Stocks aren't exactly high-yielding investments; the average yield of a stock in the S&P 500 is 1.7%. However, the oil sector is an exception. Oil stocks are higher-yielding because they are riskier due to their exposure to oil prices. A few years ago, oil producers reduced or eliminated their payouts when prices plunged.

What is the Dividend Yield?

Dividends are a per share payment distributed to shareholders monthly, quarterly, or annually. The per share payment is easy for investors to understand when it comes to getting their dividend checks, but it is hard to analyze the total return for the amount of money invested in the company’s stock by looking at per share dividend payment alone. To properly evaluate dividends, look at the dividend yield.

The dividend yield is the number of dividends a company pays relative to its stock price. It is calculated by dividing dividends paid per share by the stock price. For an investor, this is an indicator of how much dividend payment they will get in relation to the amount of money tied up in the company’s stock.

The dividend yield formula reveals important information. Dividends paid and dividend yield have a direct relationship; when one value goes up, so does the other. Also, dividend yields and stock prices have an inverse relationship; when one goes up, the other goes down. This is why during tough times if a company's dividend payments are maintained while stock values plummet, dividend yield soars.

Many stocks in the energy sector pay higher-than-average yields; the highest often come from companies that transport, process, and store oil and gas. The companies below are the top five Dividend Paying Oil-producing Stocks for 2018.

Oil Dividend Stock Ticker Symbol Dividend Yield
BP NYSE:BP 6%
Royal Dutch Shell NYSE:RDS-A; NYSE:RDS-B 6%
Eni NYSE:E 5.4%
Total NYSE:TOT 5.2%
Occidental Petroleum NYSE:OXY 4.2%
5 Highest Dividend Paying Oil Stock as of November 2018

The Oil Sector's High Dividend Yields

The oil sector is paying well because investors remain skittish based on recent years. Crude prices started tumbling in 2014 when demand weakened but production continued. Oil companies suffered low cash flow and difficulty meeting debt obligations and paying dividends. Small oil companies disappeared while the larger firms cut costs and dividend payouts.

Since then, the industry has started to recover and prices are rising again. Earnings and dividends are up but stock prices still lag, making the dividend yields high.

Here's a look at the top five oil dividend stocks.

BP

BP has the highest yield because it pays out a large portion of its cash flow to fund its dividend. In 2017, the company produced $24.1 billion in cash from operating activities and paid out dividends totaling $6.3 billion, which was just over a quarter of its cash flow. BP reinvested its excess cash in its business, spent $16.5 billion on production and repurchased shares with the remainder. With even higher oil prices in 2018, BP increased its payout by 2.5% for 2018, the company's first increase since 2014.

Royal Dutch Shell

Royal Dutch Shell is the second-highest-yielding dividend in the oil-producing sector. During the downturn in 2014, instead of cutting its payout, the company sold assets and offered investors the option of being paid in shares rather than cash. This preserved cashflow helped the company to regain a healthy balance sheet.

Cash flow has improved along with oil prices. In the first half of 2018, Shell generated $18.2 billion in cash, paid out $8.2 billion in dividends and funding, and $10 billion in capital expenses.

Eni

Eni SpA is the largest corporation in Italy and is partially owned by the Italian government (~30%) and the Chinese government (2%).

The company was originally founded in 1926 under the name Agip. It was reorganized as Italy's national oil and gas company in 1953. Eni SpA has cut its dividend payments in the past. When oil prices collapsed in 2009, Eni reduced its dividend by 23 percent. In September 23, 2015, the company reduced its interim dividend paid by 29 percent from $0.56 to $0.40.

The management of Eni does not hesitate to drop dividend payments when oil prices fall.

Total

Based in France, integrated oil producer Total SA (NYSE: TOT) is very diversified with business segments that include an upstream segment, a refining, and chemicals segment, a marketing and services segment, and a corporate segment. The company’s diversity helped limit Total's stock losses during the oil price downturn in 2014 and 2015. From December 2014 to December 2015, the company’s shares only fell 3 percent, which is a fraction compared to most oil companies.

Total has not reduced its dividend in over a decade. While the company is not a classic oil company, all of its business lines are focused on the oil market, and this diversity helped its valuation during oil’s steep price descent. Even though the company did not have the steep share price plunge to help boost yields, it still maintained a dividend yield in 2018 of 5.2%.

Occidental Petroleum

Investors tend to overlook Occidental Petroleum because it lacks the name recognition of BP, Shell, and Exxon, but it has outperformed many of its competitors over the years seeing a 500 percent annual dividend increase. The company has increased its payout 500 percent, which explains its high yields. Occidental Petroleum is planning to increase production annually at a rate of between 5 to 8 percent, which will be aided by the current oil prices.