Most investors probably haven't heard of Chord Energy (CHRD -0.34%)yet. It's a relative newcomer to the fossil fuel sector, having been formed in early July by the merger of Whiting Petroleum and Oasis Petroleum. 

However, dividend investors will want to get to know this oil stock. It recently revealed its updated capital plan, which included a massive dividend increase and signaled the potential for further boosts in the future that have the potential to turn into a monster dividend stock.

Stronger together

The combination of Whiting and Oasis created a larger-scale oil producer focused on the Williston Basin of North Dakota. The company has a top-tier position, with 972,000 net acres in the region and a combined production base of 171,100 barrels of oil equivalent per day. That increased scale positions Chord Energy to produce significant and sustainable free cash flow. 

Chord Energy initially expected to return 60% of its free cash flow to shareholders in the second half of this year through a combination of its base dividend, variable dividends, and share repurchases. That strategy would align it with a growing number of U.S. oil producers in terms of setting capital return targets. 

Devon Energy (DVN 0.29%) initially developed this blueprint with the industry's first fixed-plus-variable dividend program. The oil company set its base dividend at a sustainable level, but set a target of paying out up to 50% of its quarterly free cash flow in variable dividends. Devon uses the remaining 50% of its excess cash to strengthen its already rock-solid balance sheet, repurchase shares, and make acquisitions. Several other oil companies have set their own targets for returning a percentage of free cash flow to investors.

Setting a higher standard

Chord Energy has since updated its return-of-capital program, fueled by its low breakeven prices and strong financial position. It increased its base dividend by an eye-popping 114%. At the current stock price, it has a dividend yield of 3.6% -- one of the highest base yields in its peer group. The company also launched a new capital-return framework based on the strength of its balance sheet: 

  • Leverage above 1.0 times: Pay the base dividend.
  • Leverage below 1.0 times: Return 50%+ of free cash flow.
  • Leverage below 0.5 times: Return 75%+ of free cash flow.

With its net leverage ratio a mere 0.15 at the end of July, Chord can return capital to investors at the high end of its framework. That led it to authorize a $300 million share repurchase program. The company also intends to return additional cash to shareholders through a variable dividend. It expects to declare its next one in November for the third quarter.

That framework is similar to Diamondback Energy's (FANG 0.20%) strategy. It recently updated its capital-return target, aiming for up to 75% of its free cash flow each quarter, up from its initial goal of 50%. It aims to pay a sustainable and growing base dividend and use a combination of opportunistic share repurchases and variable dividends to achieve its targeted quarterly payout levels. 

Diamondback's strategy hints at Chord Energy's dividend potential. In the second quarter, Diamondback increased its quarterly base dividend by 7% to $0.75 per share, pushing its implied annualized dividend yield to 2.3%, based on its stock price at that time. The company also declared a $2.30 per share variable dividend payment. That boosted its total annualized dividend yield to 9.5%. Diamondback Energy also repurchased $303 million in stock in the period, pushing its total capital return to 63% of its free cash flow. 

A strong base payout with the potential for a lot more

Chord Energy is becoming an attractive dividend stock. The oil company now yields over 3.5% after doubling its base dividend. In addition to that high-yielding base payout, the company expects to make variable dividend payments, which could be substantial. That potential for a big-time income stream makes Chord Energy a stock dividend investors should get to know.