These Oil Stocks Are Delivering High-Octane Dividend Growth

The data on dividends is undeniable. Companies that pay dividends have outperformed non-payers by more than two-to-one over the last 50 years (9.2% average annual total return versus 4.3%), according to data from Ned Davis Research and Hartford Funds. Meanwhile, the highest returns have come from dividend growers (10.2%).

Some companies do a better job of growing their dividends than others. ConocoPhillips (NYSE: COP), Diamondback Energy (NASDAQ: FANG), and EOG Resources (NYSE: EOG) have delivered high-octane dividend growth, which seems likely to continue. That makes these dividend oil stocks compelling options for investors seeking high-powered total returns.

Aiming to be in the top quarter

ConocoPhillips recently increased its regular quarterly dividend by an impressive 34%. That marked a continuation of its high-octane dividend growth in recent years. The oil giant also increased its payment by 14% in 2023 and 11% in 2022.

The oil producer wants to be in the upper echelon of dividend growth stocks in the future. It plans to deliver dividend growth in the top 25% of all companies in the S&P 500.

Fueling the company's surging dividend is a combination of accretive acquisitions, high-return capital projects, and meaningful share repurchases. ConocoPhillips has capitalized on opportunities to add to its low-cost resources in recent years to increase its free cash flow. For example, it's currently working to close its $22.5 billion acquisition of Marathon Oil. The deal will be immediately accretive to its cash flow per share. In addition, the company expects to capture more than $500 million in annual cost savings. ConocoPhillips plans to use a meaningful portion of its growing free cash flow to continue buying back its stock. The oil company has retired 14% of its outstanding shares in recent years, enhancing its ability to grow its dividend per share.

The sector leader

Diamondback Energy has grown its base dividend at an industry-leading 8% average quarterly compound annual rate since initiating the payout in 2018. It has increased the payment by an impressive 620% during that time frame.

The oil company's consolidation strategy has helped fuel its high-octane dividend growth rate. Diamondback has repeatedly made accretive acquisitions to increase its scale in the Permian Basin. Those deals have lowered its costs while enhancing its free cash flow.

Diamondback recently closed its biggest-ever deal, buying Endeavor Energy Resources for $26 billion. The company expects the highly accretive acquisition to add 10% to its free cash flow per share next year. The oil company plans to return at least 50% of its growing free cash flow to shareholders via a growing base dividend, share repurchases, and variable dividends. It will use the other 50% to strengthen its already healthy balance sheet.

A different fuel source

EOG Resources recently raised its regular dividend by another 7%. The oil company has delivered 27 years of sustainable, growing regular dividends. It has raised its payout for seven straight years while growing it at a nearly 22% compound annual rate over the past decade.

The company has used a different fuel source to grow its dividend. It has avoided making costly acquisitions, preferring instead to expand organically. EOG Resources has a knack for discovering low-cost, high-return oil and gas resources across the U.S. The company only invests in drilling new wells that exceed its high return threshold. That has enabled it to generate significant and growing free cash flow.

EOG Resources produces more cash than it needs to grow its business and pay its rapidly rising regular dividend. It uses those excess funds to repay debt, repurchase shares, and pay special dividends. The company's balance sheet is so strong right now that it plans to return more than 100% of its annual free cash flow to shareholders in the near term by opportunistically repurchasing shares and paying special dividends.

High octane total return potential

ConocoPhillips, Diamondback Energy, and EOG Resources have delivered high-octane dividend growth in recent years. They expect to have plenty of fuel to continue increasing their dividends in the future. That makes them compelling opportunities for investors seeking income growth and strong total return potential.

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Matt DiLallo has positions in ConocoPhillips. The Motley Fool has positions in and recommends EOG Resources. The Motley Fool has a disclosure policy.