Are Santos Ltd (ASX: STO) shares a good investment for the dividend income they offer?
With the overall dividend payouts from S&P/ASX 200 Index (ASX: XJO) companies on the decline over the past two years, buying reliable, high-yielding passive income stocks isn't getting any easier.
So, let's run our slide rule over the ASX 200 energy stock.
Santos share price
When I'm looking to buy an ASX stock for dividend income, I first want to gauge where the share price is likely to head. The obvious idea here is to avoid buying a company whose dividend payouts will be negated by capital losses.
While the future is inherently unknown, the outlook for the Santos share price looks strong to me.
In late morning trade on Friday, shares are up 1.9%, trading for $6.93 apiece. That performance appears to be driven by a boost in the oil price overnight, with Brent crude oil up 2% to US$74.23 per barrel.
As you can see on the above chart, the Santos share price remains down 2.7% over 12 months.
But with the company's major growth projects nearing completion, and annual global oil and gas demand forecast to continue growing into 2030, I believe Santos shares are well-placed to offer capital growth as well as dividend income.
On the share price front, Morgans Financial has an add rating on Santos shares with a $7.40 price target.
Goldman Sachs is even more bullish, with a $7.90 12-month price target. That represents a potential upside of 14% from current levels.
How about that dividend income?
Returning to our headline question, then, how about that dividend income?
First, looking in the rearview mirror, Santos has increased its interim and final dividend payments every year since the second half of 2020. That's the kind of trend we want to see.
For the past 12 months, Santos paid 45.9 cents a share in unfranked dividends. This gives the ASX 200 energy stock an unfranked trailing yield of 6.6%.
While that's a solid yield, I think Santos' future dividend income will be even higher.
At the company's annual investment day on Tuesday, 19 November, Santos CEO Kevin Gallagher intrigued passive income investors with an updated capital allocation framework.
As you may be aware, Santos has been investing a lot of capital in its Barossa and Pikka projects. And those investments are getting close to paying off. Barossa is now 84% complete, with first gas expected in the third quarter of 2025. And Pikka is now 70% complete, with first oil expected in the first half of 2026.
Gallagher said Santos will "prioritise shareholder returns" when new production comes online.
Under the new capital allocation framework he announced, Santos will target returns to shareholders of at least 60% of all-in free cash flow from 2026.
Overall, I think the dividend income from Santos shares is likely to continue trending higher over the coming years.
