Many exploration and production companies are sharing the wealth generated through higher oil prices by increasing the dividend rate paid to shareholders. Although this generosity is no doubt appreciated by many investors, the current yields available are still fairly low relative to the overall market.

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Dividend Increases
EOG Resources (NYSE:EOG) increased the company's quarterly dividend to 17 cents per share starting in April 2012, a 6.25% increase over the previous rate. The company has now increased its dividend 13 times in the last 13 years. EOG Resources shareholders get a current yield of 0.59%.

Apache Corporation (NYSE:APA) also raised its quarterly dividend to 17 cents per share effective in April 2012. This dividend increase represented 13% growth over the previous level. The company cited its solid balance sheet and future growth prospects for the dividend hike. Apache Corporation has paid a dividend for 48 consecutive years and shareholders get a yield of 0.62%.

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Lower Yield than Market
Despite the munificence of these recent increases, the current yield offered by most exploration and production stocks is far below the average dividend yield of the Standard and Poor's 500, which currently stands at 1.94%.

There are many reasons to explain this lower payout. Exploration and production companies typically have many growth opportunities and would rather invest the majority of excess cash into oil and gas exploration and development.

Some companies also prefer to institute stock repurchase programs to complement dividends. Devon Energy (NYSE:DVN) completed a $3.5 billion share repurchase program in November 2011, after buying back 49.2 million shares, or 11% of its outstanding shares. (For related reading, see A Breakdown Of Stock Buybacks.)

Devon Energy also started off 2012 with an 18% dividend increase, moving the quarterly payout from 17 cents per share to 20 cents per share. The stock now yields 1.09%.

The third reason is that the energy business is inherently volatile, and many management teams still remember deep cyclical downturns that have occurred in the past. This may lead them to keep more cash than needed to manage through future cycles.

Energy investors who want a higher yield have to move up the capitalization scale. Occidental Petroleum (NYSE:OXY) offers a yield of just over 2%, after raising the company's annual dividend to $2.16 per share. This was a 17% increase over the previous level of $1.84 per share.


Occidental Petroleum has raised its dividend for 10 consecutive years and at a compound annual growth rate of 15.8% over that time period.

The Majors
The major integrated oil companies offer the highest yields to income oriented energy investors, as seen below:

Exxon Mobil (NYSE:XOM) 2.2%
Chevron Corp (NYSE:CVX) 3.04%

Conoco Phillips (NYSE:COP) 3.6%


The Bottom Line
Many investors love dividends, particularly in an era when capital gains are harder to come by. While some exploration and production companies have recently hiked dividends, the sector isn't the most generous, and investors can get higher yields in other sectors that have more stable cash flows and less growth opportunities.

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At the time of writing, Eric Fox did not own shares in any of the companies mentioned in this article.