ExxonMobil (XOM -0.83%) has a 3.3% dividend yield today, which simply pales in comparison to Devon Energy's (DVN -0.95%) massive 9.1% yield. If all you did was look at dividend yield, you'd jump on Devon in a heartbeat. But that's not enough to make a final investment call when it comes to Devon.
Here's some additional information that you need to know before you buy this stock.
Devon Energy is a perfectly fine company
Devon Energy is an onshore U.S. oil and natural gas producer. It was founded in the early 1970s and went public in the late 1980s. It has paid a dividend annually since 1993. It's fairly well respected in the energy industry, though there's really nothing particularly remarkable about it as a company.
image source: Getty Images.
Almost nothing, anyway, since it has a very large dividend yield. However, that is by design. The company recently shifted from a simple dividend, decided upon by the board of directors, to one that is variable. There is a core dividend, decided upon by the board, and then a supplemental payment based on the company's performance. This is a way for Devon Energy to return value to shareholders when energy prices are high and it is generating particularly large earnings.
There's nothing wrong with the policy and, in many ways, it is quite shareholder friendly. The problem is that you need to understand the policy when you look at the dividend yield. For example, many online quote services simply take the last dividend and annualize it when calculating dividend yield. In this case, that just doesn't lead to a reliable number since the dividend is designed to fluctuate each quarter.
The downside of Devon's dividend
And this is where the real problem comes in with regard to buying Devon Energy: The huge yield today probably isn't sustainable. That's backed up by the fact that the dividend has been reduced for three consecutive quarters. It peaked in the third quarter of 2022 at $1.55 per share and is down to $0.72 per share in the second quarter of 2023. Basically, in less than a year the dividend has been cut in half.
As the chart above shows, the dividend has basically tracked the price of oil lower with a slight lag. This is what you would expect for a company where the top and bottom lines are driven by energy prices and the dividend is tied to financial results. It is not a sign of a poorly run company, it's just how the energy business works.
However, if you are a dividend investor trying to live off of the income your portfolio generates, Devon could be a problem. ExxonMobil's lower yield is backed by a dividend that has been increased annually for over 40 years. That's a dividend you can count on. You can't quite be sure of what you'll get from Devon, which makes budgeting a bit of a problem. While some might find a benefit in Devon Energy's dividend rising when commodity prices rise, as it would offer something of an inflation hedge, most will probably find a lower but steadily growing dividend more attractive.
Devon's dividend policy matters
Devon Energy produced record levels of oil in the first quarter of 2023, and it is working hard to keep costs in check, so it is doing well operationally. And still the energy producer's financial results will depend largely on the prices it gets for the oil and natural gas it sells. That, in turn, will dictate the dividends it pays, so long as it continues with its variable rate policy.
If you believe oil is heading higher, Devon Energy could give you a double boost, with a higher dividend payment likely to be accompanied by a higher stock price. But what goes up also comes back down, so this energy stock is not the best option for all investors, even though its yield might be highly alluring ... for now.
