Passive income investors frequently fall prey to the mistake of picking stocks because they have big dividend yields. That one metric alone doesn't tell you nearly enough about a company to make a buy, or sell, decision. If you are looking for a high-yielding energy stock today, Devon Energy (DVN 0.78%) is probably on your wish list, but you might be better off buying a company like ExxonMobil (XOM 1.15%) despite its much lower yield. Here's why.
A quick look at the dividends
Devon Energy's dividend yield is a huge 8.6% right now. That's multiples of what's on offer from ExxonMobil, which has a yield of "just" 3.3%. But more context is needed.
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For example, an S&P 500 Index ETF would only provide a yield of 1.5%, so Exxon's yield is still pretty generous compared to the average stock. And the broader energy sector, using Vanguard Energy Index ETF as a proxy, has a yield of 3.1%, so Exxon's yield is still fairly attractive within the energy sector, too. Yes, Devon's yield is huge, but Exxon's isn't exactly low.
Then there's the consistency of the payment. Exxon has increased its dividend annually for an incredible 40 years or so. In and of itself that's pretty impressive, but what's even more notable is that the energy sector is notoriously cyclical. To be able to continue to grow the dividend in both good energy markets and bad shows a real commitment to investors. Devon Energy's dividend is different. The company has a policy that combines a regular dividend that gets augmented by a supplemental payment tied to the company's performance. It is, by design, meant to rise and fall along with oil and natural gas prices. That's the exact opposite of Exxon's approach, which is all about consistency.
DVN Dividend data by YCharts
If you are looking for a reliable dividend Exxon wins, hands down. If you are looking to time energy price moves, Devon Energy will probably give you more bang for the buck.
The business
The focus on consistency at Exxon goes much further than just the dividend. The company is what's known as an integrated energy major. That means it has exposure to the entire energy sector, from the upstream (production) through the midstream (pipelines) and all the way to the downstream (refining and chemicals). This diversification helps to smooth out the inherent ups and downs of the energy sector since downstream operations often benefit from the falling oil prices that hurt the upstream. Exxon also has a global reach, which can be beneficial from a diversification standpoint, too.
Devon's business model is highly focused. For example, it is just an upstream oil producer. And it only operates in the United States. This isn't inherently bad, but it is much different than what Exxon is trying to do. And, more importantly, it highlights Devon's huge reliance on volatile oil and natural gas prices to support its dividend.
The foundation
When it comes to dividends, investors also need to consider a company's balance sheet. Exxon's debt-to-equity ratio is around 0.25 times today, which is low compared to its closest integrated energy peers (only Chevron has a lower ratio). It is a financially strong company that can lean on its balance sheet during tough times so it can continue to pay its dividend. In fact, that's exactly what Exxon did during 2020 when oil demand and prices fell sharply in the early days of the coronavirus pandemic.
Devon Energy's debt-to-equity ratio is nearly 0.6 times. That's not outlandishly high by any stretch of the imagination. However, compared to Exxon, Devon's balance sheet isn't anywhere near as strong. During 2020, meanwhile, that ratio spiked to a fairly troubling 1.5 times. That's high enough that you might start worrying about a company's long-term viability, particularly since Devon was bleeding red ink at the time. If you are the type of investor that likes to sleep well at night, Devon might not be a good fit for you because history suggests that it will have to face tough times again at some point.
The conservative pick and the risky one
There's nothing inherently wrong with Devon Energy, but it is clearly a much riskier dividend stock than ExxonMobil. If all you do is focus on the highest-yielding energy stocks you could end up missing this fairly important fact. Conservative dividend investors, then, would likely be better off with Exxon even though its yield is materially lower.
