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 | Current Yield |
|---|---|
| Canadian Natural Resources (NYSE: CNQ) | 2.36% |
| Chevron (NYSE: CVX) | 3.60% |
| ExxonMobil (NYSE: XOM) | 3.69% |
| Occidental Petroleum (NYSE: OXY) | 4.39% |
| Suncor Energy (NYSE: SU) | 2.84% |
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.