That data is crystal clear. Companies that grow their dividends have outperformed over the long term. Since 1973, dividend growers and initiators have delivered a 10.7% annualized total return, according to data by Ned Davis Research and Hartford Funds. That has outperformed stocks in the S&P 500 (8.2%), non-dividend payers (4.8%), and companies with no change in their dividend (7.1%).
While many companies deliver steady dividend growth, a few stand out for their outsized dividend increases. Three stocks that could continue providing supercharged dividend growth in the future are oil and gas producers APA Corporation (APA 1.15%), EOG Resources (EOG -0.01%), and Marathon Oil (MRO).
A double with more to come
APA Corporation has spent the past few years strengthening its balance sheet. The oil and gas producer has eliminated $3.1 billion of debt since the end of 2021's second quarter, improving its financial flexibility. That's allowing the company to return more cash to shareholders.
APA set a target to return at least 60% of its free cash to investors via dividends and share repurchases. One way it's doing that is by doubling the dividend payment. That will push its dividend yield above the S&P 500's.
The company could continue growing its payout at a high rate. One factor driving that view is that APA is buying back a sizable number of shares, reducing its outstanding shares. It has already cut its outstanding shares by 12.5% from its peak and recently authorized repurchasing another 40 million shares (enough to retire 12% of its outstanding shares at the current share price).
Meanwhile, its LNG sales contract with Cheniere Energy will go into effect in the second half of next year. The deal could boost its free cash flow by more than $1 billion annually. That's a sizable uplift for a company that produced $609 million of free cash in the third quarter. It would give APA more money to return to investors via dividends and repurchases.
Rapid growth plus something special
EOG Resources has grown its dividend at a rapid pace over the years. Since its formation a quarter century ago, the oil and gas producer has boosted its payout at a 22% compound annual growth rate. That's impressive, considering all the volatility in the oil and gas markets during that period. The company currently offers a peer-leading dividend yield of 2.4%, which is also considerably higher than the S&P 500's 1.7% dividend yield.
EOG should be able to continue growing its payout at a supercharged rate. The company recently formalized its capital return plans, committing to return at least 60% of its free cash flow to shareholders each year. Paying a sustainable and base dividend is the foundation of that plan. EOG Resources sends additional excess cash to shareholders by paying special dividends to achieve its capital return target.
The company will likely continue growing its base dividend at an above-average pace in the future. Its premium drilling strategy earns high returns, enabling the company to generate lots of cash. Meanwhile, with a pristine balance sheet -- EOG has roughly $200 million of net cash -- it doesn't have much need for its excess cash. These factors should allow EOG to continue growing its dividend at an above-average pace.
Adding more dividend fuel
Marathon Oil has rapidly increased its dividend over the past couple of years. It has given investors a raise in six of the last seven quarters, including by 13% in the third quarter. Overall, Marathon's base dividend has surged 200% since early 2021.
That payout should continue rising. One factor driving that view is its steadily declining share count. Marathon has repurchased $3.4 billion of its shares since achieving its leverage target last October, reducing its outstanding shares by 20%. The company recently added another $2.5 billion to its authorization, enabling it to gobble up even more shares. That should allow it to continue boosting its per-share dividend even if it doesn't increase its total dividend outlay.
Meanwhile, Marathon recently agreed to buy Ensign Natural Resources for $3 billion in cash. The highly accretive deal will boost its free cash flow by 15% next year, assuming current oil and gas prices. Marathon expects to increase its dividend by another 11% upon closing that deal.
Big-time dividend growth potential
APA Corporation, EGO Resources, and Marathon Oil have grown their dividends at outsized rates in recent years. Those upward trends should continue in the future because all three companies prioritize returning more of their growing free cash flow to shareholders. That makes them compelling options for dividend growth investors to consider buying.
