Putting some numbers to this argument, management believes it will have a free cash flow (FCF) yield of 9% in 2025 based on a price of oil of $70 a barrel and the stock price on Nov. 1 of around $38.32. Interpolating for the current stock price suggests an FCF yield of 8.9%. In theory, Devon could pay all of that in dividends. However, management tends to return 70% of FCF to investors, with 30% earmarked to improve its balance sheet (debt reduction).

As such, if 70% of returns are in the form of dividends, this implies a 6.2% dividend yield. That would be fine, but given that the stock trades on such an attractive FCF yield, it makes more sense to use investors’ money to buy back stock yielding 8.9% in FCF.

As such, provided FCF stays high, Devon will have plenty of potential to increase its dividend significantly, not least as FCF per share will drop given the share count reduction.

In common with Devon, Diamondback Energy didn’t pay a variable dividend in the third quarter. Also in common with Devon, which acquired Bakken-focused Grayson Mill, Diamondback is expanding its production through a merger with Permian-focused Endeavor Energy (expected to close in the fourth quarter).

The parallels don’t stop there. Diamondback also expects to gush cash flow in 2024, with management forecasting $3.4 billion at commodity currency prices. It’s an FCF representing 6.4% of the current market cap. The market is likely valuing Diamondback over Devon due to the Endeavor deal.

Indeed, there’s good news on that front, with management recently lowering its post-dividend breakeven price of oil to $37 a barrel from an initial estimate of $40 a barrel.

In plain English, provided the price of oil stays above $37 a barrel, Diamondback will be able to pay its base quarterly dividend of $0.90, or $3.60 a year. That equates to a 2% dividend yield. However, given that the price of oil is currently around $70 a barrel, and management takes an opportunistic approach (just as Devon does) in making share buybacks when its valuation is low or increasing its variable dividend where possible, the stock has plenty of potential to grow its dividend in the coming years.

All told, the Global X MLP ETF offers excellent dividend yields now. If you believe energy prices will hold up, then Devon and Diamondback are likely to return to increasing their variable dividends in the future.

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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.

3 High Yield Energy Stocks That Are Screaming Buys Now was originally published by The Motley Fool