On 29 October Royal Dutch Shell (RDSB) provided the market with a positive surprise, increasing its dividend by 4% as it booked a larger than forecast third-quarter profit.

However, before we get too excited by the dividend hike, it is but a ripple in the ocean when you consider the pay-out had been cut by two thirds back in April.

While profit of $955 million might sound impressive in isolation, it was less than a quarter of the total a year earlier.

Its rival BP (BP.) also did a better than expected with its third quarter numbers (27 Oct) but its own profit of just $86 million is worth putting in context.

Just think about the amount of manpower, expertise, time and resources which were put in to achieve a profit of less than $100 million. It employed some 70,100 people as at December 2019 – though it has announced job cuts since – and operates in nearly 80 different countries across the globe.

When you consider the exposure of BP and Shell to an oil price which recently dipped back below $40 per barrel on lockdown fears and a ramp up in Libyan production boosting industry supply at a time when demand is fragile, it is little wonder their shares are trading at generational lows.

You must remember these companies are having to gradually move out of oil and gas and into greener alternatives under pressure from governments, regulators and investors and the cost of this transition is likely to impair their dividend-paying capacity in the coming years.

Further down the food chain, oil firms are not facing quite such an acute problem. The same day Shell announced its 4% dividend increase, Diversified Gas & Oil (DGOC) – a recent entrant to the FTSE 250 – raised its own pay-out by 7%, building on a 7% increase in the previous quarter. According to Investec forecasts, the stock trades on a dividend yield of around 10%.

Diversified Gas & Oil focuses on low-cost, mature natural gas fields and it looks to grow output through acquisitions, using the cash flow from this production stream to fund its dividend.

There are a handful of other small cap oil and gas firms which pay dividends of varying generosity, Jadestone Energy (JSE:AIM) and Serica Energy (SQZ:AIM) paid maiden dividends in 2020. There are others who have talked about paying dividends in the future including Touchstone Exploration (TSE:AIM).

Many small and mid-cap oil and gas stocks have been shunned by the market thanks to weak returns, a lack of exploration success and questionable corporate governance – to name just three negative factors.

Perhaps in the future more companies will go down the low-cost production route and use that to fund the dividends which could get investors back on board.

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