HomeBusinessThese 3 High-Yield Dividend Stocks Generate Cash

These 3 High-Yield Dividend Stocks Generate Cash

Devon Energy (NYSE: DVN), Vitesse Energy (NYSE: VTS)And Diamondback energy (NASDAQ: FANG) These are all high-yield energy stocks with excellent growth prospects. While it’s never a good idea to go ‘all in’ on one sector (unless you have a good handle on the price of oil), these three stocks offer good options as part of an income-seeking, diversified portfolio.

Flowing cash

It’s no secret that, based on current valuations, the market isn’t in love with energy stocks. Highly cyclical stocks often appear undervalued due to market prices and the volatility inherent in their earnings, which are driven by oil prices. That said, if you take an agnostic view and estimate an oil price similar to today’s price, then these three stocks look like excellent value.

An oil field worker.

Image source: Getty Images.

Wall Street analysts typically take this approach, rarely deviating from the assumption that current oil prices will not prevail in the long term. As such, free cash flow (FCF) figures and the ratio of free cash flow to market capitalization (free cash flow yield) reflect the current oil price and its impact on sales, profits and cash flow.

All of this is kind of a long-winded way of saying: don’t look at this table without understanding that the numbers in it are subject to significant revisions based on the direction of oil prices. Still, there’s little doubt that the shares are good value.

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Company

TTM dividend yield

FCF 2024

FCF yield 2024

FCF 2025

FCF yield 2025

Devon Energy

4.1%

$3.3 billion

10.5%

$3.2 billion

10.3%

Vitesse Energy

8.8%

$45 million

6.4%

$82 million

11.6%

Diamondback energy

4.7%

$3.2 billion

8.5%

$5.8 billion

9.2%

Data sources: marketscreener.com, author’s analysis. TTM = after 12 months.

Free cash flow and business developments

I used FCF because most companies base their capital allocation strategies on it. Furthermore, by looking at FCF it is easy to see that the underlying potential for all three companies to pay a dividend is is even better than suggested by their dividend yield over the last twelve months.

In theory, all three could return free cash flow to investors as dividends. In reality, however, businesses also use cash in several other ways, including:

  • Repaying debt (which reduces interest payments and improves future FCF generation).

  • Buying back shares (which reduces the number of shares and increases shareholders’ claim to future free cash flow).

  • Support asset acquisitions (which will add FCF).

These considerations speak directly to the three companies in 2024.

Devon Energy

Devon Energy’s 2024 capital allocation plan involves using 30% of free cash flow to repay debt and returning the remaining 70% to shareholders through buybacks and dividends. However, management believes the shares are undervalued and is prioritizing share buybacks this year.

The company pays a fixed dividend of $0.22 per quarter, and then the remaining free cash flow can be spent on share buybacks or a variable dividend. Management decided to use $205 million for share buybacks in the first quarter, compared to only $82 million for the variable dividend ($0.13 per share). Annualizing the total first quarter dividend of $0.35 results in a dividend yield of 2.8% at the current share price. That might disappoint some investors, but share buybacks reduce the number of shares. As you can see from the table above, Devon Energy has plenty of potential to increase its variable dividend in 2025.

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Vitesse Energy

Vitesse Energy focuses on the fixed dividend of $0.525 (an annualized dividend yield of 8.8%) and invests in development assets in North Dakota. It has also authorized a $60 million share buyback program.

The asset acquisitions in North Dakota prompted management to increase the 2024 production forecast from a previous estimate of 12,500 barrels of oil equivalent (boe/d) to 13,500 barrels of oil equivalent (boe/d) per day. However, the acquisitions also caused management to increase the midpoint of the capex forecast by $40 million, directly eating into 2024 free cash flow.

With the new assets added to production in 2025, Vitesse is poised to increase its free cash flow, making the current dividend easily sustainable.

Diamondback energy

The company’s main priority is to complete its merger with privately held Endeavor Energy Resources in the fourth quarter of 2024. As stated in the deal announcement, the deal is expected to result in “significant pro forma cash flow and an increase in free cash flow per share.” “

However, the need to reduce debt after the deal means that Diamondback “has reduced our future return on capital investments to at least 50% of free cash flow, compared to at least 75% previously,” according to a letter from CEO Travis Stice to investors . .

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Diamondback spent $42 million on share buybacks in the first quarter. Yet it yielded nothing in the second quarter until the end of April. It will pay out $0.90 per share as a base dividend and $1.07 as a variable dividend, for a total quarterly dividend of $1.97. On an annual basis, this yields a dividend yield of 4% at the current price. Considering the circumstances, that is an excellent yield.

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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Vitesse Energy. The Motley Fool has a disclosure policy.

These 3 High-Yield Dividend Stocks Generate Cash was originally published by The Motley Fool

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