Many income-focused investors put too much emphasis on a stock's current yield. A better approach is to focus on a company's ability to increase its payout.
That's clear from the data. Over the last 50 years, dividend growers in the S&P 500 have delivered an average annual total return of 10.2%, according to data from Hartford Funds and Ned Davis Research. That compares to a 6.6% total annual return for companies with no change to their dividend policies.
ConocoPhillips(NYSE: COP), EOG Resources(NYSE: EOG), and MPLX(NYSE: MPLX) stand out for their ability to increase their dividends. The energy companies recently gave their investors another big raise and should have plenty of fuel to continue growing their payouts in the future.
Focused on delivering high-octane dividend growth
ConocoPhillips recently increased its quarterly dividend by 14%, boosting its payment to $0.58 per share ($2.32 annualized). That sizable increase is "consistent with our long-term objective to deliver top quartile growth relative to the S&P 500," stated CEO Ryan Lance in its recent third-quarter earnings report. It pushed the oil giant's dividend yield up to around 1.9%, slightly above the S&P 500's average of 1.6%.
In addition to a rapidly rising base dividend, ConocoPhillips also makes variable return of cash (VROC) payments to its investors each quarter. In 2023, the company plans to return $11 billion in cash to shareholders through its base dividend, VROC payments, and share repurchases. It recently declared its latest VROC payment of $0.60 per share (a rate it has paid each quarter this year). That has increased its total cash yield to an annualized 3.9% in 2023.
ConocoPhillips should be able to continue returning more cash to its investors in the future. The company plans to grow its free cash flow by 11% annually over the next decade. That plan assumes oil averages $60 per barrel (well below its current price in the low-$80-per-barrel range). That growing free cash flow should enable ConocoPhillips to continue increasing its base dividend at a high rate, while returning additional cash to investors through its VROC and share repurchase programs.
Boosting its cash return target
EOG Resources recently raised its quarterly dividend by 10%, pushing the per-share total to $0.91 ($3.64 per year). That drove the oil producer's dividend yield up around 2.8%. EOG has grown its dividend at a 21% compound annual rate over the last 26 years.
On top of its base payout, EOG returns additional excess cash to shareholders by routinely paying special dividends. The company declared a special dividend of $1.50 per share in the third quarter. It also made a $1.00-per-share special dividend payment earlier this year.
EOG Resources plans to continue returning substantial cash to shareholders in the future. The oil company recently increased its minimum cash return target from its current level of 60% of its free cash flow to 70% starting in 2024. While the company will opportunistically repurchase shares, the bulk of its cash return has come from dividend payments over the years. That suggests investors will continue to collect a lot of dividend income from EOG in the future.
A cash distribution machine
MPLX recently raised its distribution by 9.7%. That pushed the master limited partnership's (MLP) payout up over 9%. The midstream company has increased its distribution every year since its formation in 2012.
The MLP generates substantial cash flows to cover its big-time payout. It has produced $3.9 billion in net cash from operating activities this year, enough to cover its distributions ($2.4 billion) and capital investments ($727 million) with plenty of room to spare ($752 million in excess free cash). That enabled the company to strengthen its already fortress-like balance sheet.
MPLX is investing capital to grow its pipeline infrastructure and gathering and processing businesses. It has several projects under construction that should come online over the next couple of years. Those projects will grow its cash flow, giving it more fuel to increase its distribution. Meanwhile, its top-notch balance sheet provides additional financial flexibility to acquire income-producing energy midstream infrastructure.
More income growth ahead
ConocoPhillips, EOG Resources, and MPLX have been dividend growth machines over the years. That should continue as they grow their cash flows, giving them more money to pay dividends. Those growing payouts could give these energy stocks the fuel to produce strong total returns, making them look like attractive investments for the long haul.
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Matthew DiLallo has positions in ConocoPhillips. The Motley Fool has positions in and recommends EOG Resources. The Motley Fool has a disclosure policy.
