Oil Stocks: Heres Where to Find Big Dividend Growth

By Markets Fool.com

Thanks to relatively stable oil prices over the past three years, oil stocks have been one of the best places to find dividend growth. However, with oil prices recently taking a beating, this could cause some of these high yielding stocks to press pause not just on dividend growth, but on the dividend itself. That said, there is one oil stock planning to reward its investors with double-digit dividend growth over the next two years. That stock is Phillips 66 .

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Source: Phillips 66

Spending money to make more money
Phillips 66 recently announced its 2015 capital spending plan of $4.6 billion. That's a big jump from the company's 2014 plan, which started at $2.7 billion but was boosted mid-year to $3.9 billion as a result of new project approvals as well as to fund an acquisition. However, this boost coincides with the company's income growth and it is expected to be money well spent as the investments in growth are expected to deliver even more cash flow, which will be a key driver of future dividend increases.

The vast majority of the 2015 capital plan is expected to be spent growing the company's midstream business, including its MLP Phillips 66 Partners . Overall, the company plans to invest $3.2 billion on a variety of projects including its Freeport LPG Export Terminal, rail infrastructure to move more oil from the Bakken to market centers in the U.S. as well as investments to expand its recently acquired Beaumont terminal in Texas. A full $3 billion of the $3.2 billion in midstream capital will be invested in growth oriented projects with the rest of the capital spent to maintain its operations. These growth focused investments are really what will be driving the company's dividend growth in the years ahead as the midstream segment is expected to deliver meaningful growth in the company's underlying cash flow as we see on the following slide.

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Source Phillips 66 Investor Presentation

The other big chunk of capital the company plans to spend next year will be on its refining assets where $1.1 billion will be spent. However, $800 million of that capital is needed just to sustain the company's refineries so growth projects will be limited to just $300 million. That said, these growth investments will be directed toward smaller, high-return, quick pay-out projects so the impact of these investments will be felt right away.

Where those returns will go
As these growth projects come online the additional cash flow will then be funneled into two separate directions. About 60% the company's total cash flow will be reinvested each year to sustain and grow the business, which deliver future cash flow growth. However, as we see in the following slide that's only part of the equation.

Source: Phillips 66 Investor Presentation

As the chart in the slide noted, Phillips 66 is also committed to returning 40% of its cash flow back to shareholders via dividends and share buybacks. So, as its income grows so does its dividend. We saw this last year as shareholders enjoyed a 28% dividend boost as part of the $3.9 billion in cash returned to investors via dividends and stock buybacks. Given the projects the company currently has under way it expects to be able to grow its dividend by a double digit annual rate for at least for the next two years. We don't yet know what that rate will be, but even a very low 10% boost each year means that investors buying today at its current yield of 2.7% will see that grow to at least 3.3% in two years.

Investor takeaway
Given the fall in oil prices we'll likely see dividend growth slow among oil stocks. However, that's not the case at Phillips 66 as it's expected to deliver double-digit dividend growth for at least the next two years. Because of that, it's a great oil stock to buy for investors looking for a safe dividend these days.

The article Oil Stocks: Heres Where to Find Big Dividend Growth originally appeared on Fool.com.

Matt DiLallo owns shares of Phillips 66. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.