Companies that grow their dividends tend to produce the highest total returns over the long term. According to data from Hartford Funds and Ned Davis Research, dividend growers in the S&P 500 have delivered a 10.2% annualized total return over the last 50 years. That has outperformed the average S&P 500 member's 7.7% total return.
Some companies do a better job growing their dividends than others. EOG Resources(NYSE: EOG) and Phillips 66(NYSE: PSX) stand out for their high-octane payouts. Here's why investors won't want to overlook these dividend oil stocks.
Rapid growth (plus something special)
EOG Resources is one of the largest oil and gas producers in the country and focuses on developing its highest return locations. That returns-focused investment strategy has paid big dividends over the years by allowing EOG Resources to generate significant and rising free cash flow.
One of the company's top priorities for its free cash flow is to pay a sustainable and growing regular dividend, and it has delivered dividend stability and growth for 26 years. While the company hasn't increased its payout every year, it has boosted the payment by an eye-popping 2,900% since it started paying them in 1998, including by 10% over the past year. The company's high-octane payout has helped fuel an average annual total return of 13.1% over its history.
EOG Resources' regular dividend currently yields nearly 3%, well above the oil sector average (around 2%) and the S&P 500's average (about 1.3%). In addition to paying a regular quarterly dividend, EOG Resources has routinely made special dividend payments in recent years because it generates much more cash than it needs.
The company should have plenty of fuel to continue paying higher dividends. EOG Resources expects to grow its free cash flow per share by a more than 6% annual rate over the next few years, fueled by its high-return drilling program. With a strong balance sheet and a dividend-focused capital-return strategy, EOG Resources should remain a top-tier dividend-growth stock.
A high-octane payout
Phillips 66 is a leading integrated downstream energy company with operations that include refining, midstream, chemicals, and marketing and specialties. This diversification helps reduce earnings volatility, enhance margins, and provide new growth opportunities.
The company aims to return more than half its cash flow to shareholders, and paying a growing dividend is a key aspect of its capital-return strategy. It has steadily raised its dividend since its formation in 2012, growing it at a 16% compound annual rate. That has helped fuel a 15.8% annualized total return during that period.
Phillips 66 should have plenty of fuel to continue increasing its dividend (which currently yields over 3%) in the future. It's investing to expand its operations, improve its margins, and capture cost savings. The company is currently targeting to add more than $4 billion to its annual earnings by 2025, growing it to over $14 billion.
It's investing in several organic expansion projects (including a renewable diesel production facility) to increase its earnings and making strategic acquisitions to increase its scale, capabilities, and income, including recently spending $550 million to buy Pinnacle Midstream. These growth-focused investments and cost-saving initiatives should give it more money to return to shareholders through a growing dividend and meaningful share repurchase program. (Phillips 66 has retired 32% of its outstanding shares since its formation in 2012.)
Top-notch dividend growth stocks
EOG Resources and Phillips 66 have done an exceptional job increasing their dividends over the years. Their rapidly rising payouts have helped give these energy stocks the fuel to produce strong total returns, and they're in excellent positions to continue increasing their dividends in the future. Because of that, investors won't want to overlook these great dividend stocks.
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Matt DiLallo has positions in Phillips 66. The Motley Fool has positions in and recommends EOG Resources. The Motley Fool has a disclosure policy.
