Many income investors focus on stocks with high dividend yields. However, a better approach is concentrating on dividend stocks that can grow their payouts at high rates, because these companies tend to produce greater total returns.
Two stocks with big-time dividend growth potential are oil producers. Here’s a look at why these oil stocks could fuel big-time dividend growth for investors in the coming years.
The fuel for a potentially monster payout in 2021
Devon Energy currently yields around 2.3%, well above the S&P 500‘s roughly 1.5% average. That dividend is on a rock-solid foundation despite all the turbulence in the oil patch. That’s because Devon can generate enough cash to cover its payout and the capital needed to keep its production flat at an average oil price of around $33 a barrel this year. On top of that, it has a fortress-like balance sheet with a low leverage ratio, more than $2 billion in cash, and minimal near-term debt maturities.
Given its strong financial profile, Devon plans to start paying a variable quarterly dividend of up to 50% of its excess cash. To put the size of those incremental payouts into perspective, at $40 oil, the company could produce more than $500 million of free cash flow.
If Devon paid out half those funds, it would more than double its dividend. Meanwhile, with crude oil prices currently above $50 a barrel, Devon is on track to produce an even bigger gusher of free cash flow this year of nearly $1.5 billion. Because of that, the company could easily more than double its dividend if oil prices hold up.
Full story on Fool.com