The decline in oil prices over the past few years has dramatically impacted the oil and gas industry's ability to pay dividends to shareholders. Cash flows shrank as oil plunged, which forced most producers to cut back spending to survive. In many cases, one of the first outflows to go were dividends, because producers needed the cash to finance in-process growth projects.
That said, several larger oil producers were able to withstand the market downturn and not only maintain their dividend payouts but continue growing them even as they kept investing in the future. Now, with oil prices stabilizing in the upper $50s and those investments starting to come online, these companies have an even greater ability to keep increasing their already above-average payouts. That ability to survive and now thrive makes them excellent oil dividend stocks to buy now, with the following five standing out as the top options:
Oil Dividend Stock
Canadian Natural Resources (NYSE: CNQ)
Chevron (NYSE: CVX)
ExxonMobil (NYSE: XOM)
Occidental Petroleum (NYSE: OXY)
Suncor Energy (NYSE: SU)
Data source: YCharts.
These five oil stocks have been pumping out dividends for decades. Image source: Getting Images.
A gusher of cash flow is coming down the pipeline
With a strong balance sheet heading into the oil market downturn, Canadian Natural Resources had the financial flexibility to continue investing in growth initiatives while still paying a growing dividend, which it has now increased for 17 straight years after boosting it an impressive 17% last year. Those investments to expand its production position the Canadian energy giant to generate a gusher of cash flow in the years to come. In fact, the company currently expects to produce enough cash to finance 4.3 billion Canadian dollars ($3.3 billion) of new investments next year and pay its dividend with CA$2.3 billion to CA$2.7 billion ($1.8 billion to $2.1 billion) left over at current oil prices. That ability to generate substantial excess cash even though oil remains relatively low suggests the payout is on solid ground. In fact, it's likely that Canadian Natural Resources will continue growing the dividend by a peer-leading rate in 2018 and beyond given its expectation that cash flow will increase by a 13% compound annual rate through 2021.
Flipping the switch on cash flow
Chevron has also continued investing during the oil market downturn while increasing its dividend, which is something it has done for 30 straight years. While many questioned the sustainability of the payout in 2015 and 2016 as the company outspent cash flow by an average of $12 billion each year, those concerns have faded away this year given that the oil giant has generated $500 million in free cash flow after paying the dividend. Meanwhile, despite tacking on a significant amount of debt to finance its growth initiatives during the downturn, the company's leverage ratio remains in a comfortable range. As a result, Chevron will likely continue increasing its dividend in the coming years, especially given its forecast for free cash flow, which could reach $4 billion by 2020 even if oil stays at $50 a barrel. And if crude prices rise, so would the company's excess cash, with Chevron projecting the potential to produce nearly $8 billion in free cash flow in 2020 if crude is in the $60s, and as much as $12 billion if it tops $70 a barrel.
Image source: Getty Images
Quickly fading fears
ExxonMobil also resisted calls to cut its dividend during the dark days of the oil market downturn when it was vastly outspending cash flow to finance expansion projects. However, like Chevron and Canadian Natural Resources, it could afford to keep spending thanks to its top-tier balance sheet. Meanwhile, with oil prices now having improved a bit, those investments are starting to pay off. So far this year the company has generated $22.7 billion in cash from operations, which more than covered its $9.7 billion dividend outlay and the $10.9 billion it spent on additional growth projects, leaving it with excess cash to repurchase $500 million in stock and pay off some debt. Meanwhile, with more growth projects coming on stream, and oil prices likely to remain stable, if not head higher, Exxon should be able to continue increasing its dividend, which is something this Dividend Aristocrat has done for 35 straight years.
Building a firm foundation at $40 a barrel
Like most oil companies, Occidental Petroleum worked hard during the oil market downturn to get to the point where it could thrive on lower oil prices. It aims to be able to fund its dividend and the capital needed to keep production flat on the cash flow it would pull in at $40 oil, which would then enable it to increase output by a 5% to 8% annual rate at $50 oil. While the company hasn't reached this level just yet, it has a clear path to get there soon. Furthermore, it has ample liquidity to stay on plan even if oil falls. Therefore it looks increasingly likely that Occidental Petroleum will be able to keep growing its dividend as has been the case in each of the last 15 years.
Image source: Getty Images.
On pace for double-digit annual increases through 2019
Canadian oil sands giant Suncor Energy has also increased its payout for 15 straight years. However, that streak doesn't appear to be ending anytime soon given that the company is in the process of completing two major growth projects, which, when combined with some recent acquisitions, position it to grow production by a 10% compound annual rate through 2019. That output should generate more than enough cash at current oil prices to enable Suncor Energy to continue investing in expansion projects, grow its dividend along with production, and repurchase CA$1 billion to CA$2 billion ($780 million to $1.6 billion) in shares per year. Plus, if oil falls, the company can tap the brakes on the buyback since it can amply cover the dividend and its current annual capital spending level even if crude fell back to $40.
Core oil stocks for almost any portfolio
One thing all five of these oil stocks have in common is that each can generate the cash needed to maintain their dividend and invest in growth projects at current oil prices. Consequently, all should have no problem continuing to pay (and likely grow) shareholder payouts even if the price of oil remains relatively low. That makes them excellent choices for investors who are seeking to add an oil-fueled dividend to their portfolio.
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