Devon Energy (DVN 0.77%) is one of those stocks where you need to be extremely clear about what you own or you could end up burned, badly. It's not a bad company -- it's just that its stock comes with some nuances that you might overlook if you get overly enamored with its huge 9% dividend yield. And that could leave you feeling upset with yourself.

Here's why Devon Energy might be a buy for some investors but a terrible choice for those looking for consistent dividend payouts.

What does it do?

At its core, Devon Energy is an oil and natural gas producer. It operates in the onshore space of the U.S. energy sector, with exposure to five producing regions. It has been expanding its size via bolt-on deals, recently adding exposure in the Eagle Ford basin in Texas and the Williston Basin in North Dakota. 

A person in front of energy infrastructure.

Image source: Getty Images.

In the third quarter, Devon Energy produced roughly 614,000 oil-equivalent barrels per day, beating its guidance by 2%. It had 21 drilling rigs operating and brought 103 new wells into service. It has been able to keep its operating costs low, which allowed its field-level cash margins to expand by 40% year over year. In other words, it's doing pretty well right now.

And this is a good time to be producing oil: The average realized price of an oil-barrel equivalent for the company rose by roughly 38% year over year in Q3. That's because crude oil prices have been higher than normal -- as you might have guessed from the elevated prices you've been paying for gasoline and all the headlines outlining the various supply and-demand issues in the energy sector. Those issues range from geopolitical tensions to OPEC's decisions to cut production, but the outcome has largely been generally high energy prices. 

This is why Devon Energy was able to pay its shareholders a huge $1.35 per share dividend in the third quarter, 61% more than the dividend it paid in the prior-year period. So far investors should really like what they see here.

There's a downside

The problem is that oil and natural gas are highly volatile commodities, making the energy sector a cyclical industry prone to both impressive upturns and swift downturns. The market has experienced the full range of those dramatic swings since 2020, when the advent of the coronavirus pandemic resulted in a steep drop in global oil demand that pushed crude prices to historic lows. While that downturn was particularly intense, with West Texas Intermediate crude (a key U.S. oil benchmark) actually falling below zero at one point, energy price volatility really isn't all that unusual in the grand scheme of things.

So while Devon Energy is doing quite well today, there will come a time when it won't be. That's just the nature of the business. Which brings the story back to its dividend. While some large oil companies such as ExxonMobil and Chevron focus on providing stable dividends, Devon quite intentionally does not. Management has  structured its payouts in two parts, with a fixed dividend that gets supplemented by a variable dividend based on the company's recent performance. 

This rewards investors during the good times. However, they'll collect smaller dividend checks when times get tough. Investors looking for relatively stable, consistent payouts should look elsewhere.

The third quarter offers a perfect example. The payment was up 61% over Q3 2021, but it was also down nearly 13% from Q2 2022. That may seem like a modest sequential slide given the year-over-year increase, but when you consider the volatile nature of oil prices, there's no reason to believe that the dividend couldn't fall all the way back to the level of a year ago. Or, worse, to the less than $0.10 per share that Devon Energy paid in each quarter of 2019.

DVN Dividend Chart

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In essence, over the past three years or so, investors have likely seen the extremes of what they can expect from Devon on the dividend front. But they shouldn't count on either end of that range to be the ongoing status quo. 

For the right person

To state the obvious again, Devon Energy's dividend, by its nature, will not be a good fit for investors looking for stable payouts. However, if you are specifically looking for a way to leverage yourself to increasing energy prices, it could be a good fit for your portfolio. Rising energy prices should lead to larger dividend payments from Devon Energy. Thus, in the end, Devon Energy is an acquired taste, but you have to look past today's fat dividend yield to see why.