The energy sector is ripe for stock-picking right now. Falling crude oil and natural gas prices, rising interest rates, and broader fears of a slowdown have hit share prices, offering investors a great opportunity to park some money in promising stocks, especially ones that also pay big dividends. Devon Energy (DVN 0.06%) and NextEra Energy (NEE 0.31%) are top contenders, with both stocks losing ground in recent months. Here's the better stock between the two to buy right now.
An outstanding passive income opportunity
George Budwell (Devon Energy): Devon Energy is an Oklahoma-based energy company specializing in U.S. onshore drilling. It sports a premier portfolio of U.S.-based shale basins, including the Anadarko Basin, Delaware Basin, Powder River Basin, Williston Basin, and Eagle Ford. Thanks to its advantageous location, Devon has generated stellar well performance and peer-leading production costs in recent years. In the first quarter of 2023, for instance, the company hit an all-time production high of 320,000 barrels of oil per day.
NYSE: DVN
Key Data Points
What's the investing thesis? Apart from its stellar operating efficiencies and relatively low-risk production facilities, Devon stock has a highly attractive valuation and a sky-high dividend yield. On the valuation side, the company's stock is currently trading at a forward-looking 14% earnings yield. Thus, its shares are a downright bargain relative to a risk-free asset such as a 10-year U.S. Treasury bill.
Devon's yield consists of a fixed and a variable component, with the variable component being tied to free cash flow. While there is some uncertainty regarding the company's future profitability due to the diminishing global economic outlook, Devon's stock presently pays a 9.3% annualized yield. That figure is markedly higher than the 1.66% average among S&P 500 (^GSPC 0.11%) stocks. So, even if the variable aspect of Devon's yield takes a hit later this year, the company should still offer shareholders a well-above-average quarterly distribution.
All told, Devon's bargain basement valuation and enormous dividend yield make it a top energy stock to buy right now.
This dividend growth stock can help you build wealth
Neha Chamaria (NextEra Energy): There are great reasons to own Devon Energy stock, including its high dividend yield and the variable component of its dividend that rises alongside cash flows. However, that also means Devon's dividend payout can decline steadily if oil prices fall -- something that investors may have noticed in recent quarters. This, and the fact that the world is slowly but gradually transitioning to renewable energy, are the two biggest reasons why I'd prefer buying NextEra Energy stock over Devon Energy now.
NextEra Energy's clout in clean energy is like none other -- it is the world's largest producer of wind and solar energy. At the same time, NextEra Energy also owns and operates the largest electric utility in the U.S., FPL, in terms of customer base and retail sales. This combination of a steady cash-generating traditional utility business and a fast-growing clean energy arm has hugely worked in shareholders' favor over the decades and should continue doing so given its massive growth plans.
NextEra Energy plans to spend nearly $32 billion to $34 billion on FPL between 2022 and 2025 while adding at least 33 gigawatts of renewables capacity between 2023 and 2026. These investments could boost NextEra Energy's adjusted earnings per share by 6% to 8% through 2026 and support dividend growth. The company is confident of increasing its annual dividend per share by 10% through "at least" 2024.
So although NextEra Energy stock yields only 2.5%, which is far below Devon's yield, its steady dividend growth should add to investors' total returns. With the stock now down almost 12% year to date, NextEra Energy is a no-brainer stock to buy for the long term.
The better stock to buy
There's no denying the compelling investing thesis for both Devon Energy and NextEra Energy, especially for passive income investors. Yet, while Devon's dividends are exposed to the volatility in oil prices, NextEra Energy is relatively a safer dividend stock in terms of dividend stability. Risk-averse investors, therefore, may want to buy NextEra Energy shares right now.
An even smarter bet, though, could be buying some shares in both companies. By doing so, you can enjoy Devon's sky-high yield and occasionally receive fat dividend checks. And when oil markets are in turmoil, you can bank on NextEra Energy's dividends while also expecting to reap the benefits of investing in a high-potential industry like clean energy.
