Devon Energy (DVN +0.54%) is not the type of stock that a conservative income investor will likely find attractive. Not only does it operate in the highly volatile energy sector, but its dividend is specifically designed to rise and fall over time. But, for more active investors, this volatile stock could be an interesting investment opportunity. And the variable dividend is a key part of the story.
Devon's performance is volatile
Investors in the energy sector need to go in with their eyes wide open. Oil and natural gas are commodities prone to material, and often rapid, price swings. Some energy companies design their businesses around this in such a way that the peaks and valleys don't have as much effect on their investors. For example, ExxonMobil (XOM 0.48%) has increased its dividend annually for four decades.
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Others embrace the inherent price volatility in the energy sector and just accept that financial performance will rise and fall. This is Devon Energy's approach. But the company is cognizant that investors want to be rewarded well during energy upturns. So it has tied its dividend to its financial performance. That means the dividend will increase when oil prices are rising, and decrease when oil prices are falling.
The last few years have been something of a roller coaster ride for energy stocks. During the early days of the pandemic, economies around the world were effectively shut down in an attempt to slow the spread of the coronavirus. That resulted in a drop in energy demand and energy prices that was particularly acute in 2020. Oil companies struggled, with even the most conservative giants, like Exxon, incurring substantial losses.
WTI Crude Oil Spot Price data by YCharts
But as economies reopened, demand came back and energy prices rose. Add in other complicating factors, including geopolitical conflicts and supply chain snarls, and the increase in oil and natural gas prices turned into a very big spike. Energy companies did very well, including Devon Energy. In fact, its performance-linked dividend rose from a low of $0.09 per share in the first quarter of 2020 to a high of $1.55 in the third quarter of 2022.
A drop that's being followed by another bounce
Trees don't grow to the sky, and oil prices inevitably came back down. That crimped Devon Energy's financial results and led to a series of dividend cuts. Since peaking at $1.55 per share per quarter, the dividend has now retreated for a full year, hitting $0.49 per share in Q3 2023.
But oil has started to rise again, with West Texas Intermediate (WTI) crude going from around $73 per barrel in March to a recent high above $90. WTI is a key U.S. energy benchmark. To be fair, prices peaked about $20 per barrel higher in 2022, so this isn't a return to post-pandemic highs --at least, not yet. But Devon's financial performance is likely to start improving in the quarters ahead, and that should mean higher dividends for shareholders.
Adding to the potential business upturn is Devon Energy's growing production (the company achieved an all-time high in the second quarter), strong well productivity, and attractive break-even point of around $40 per barrel. All these things position the oil driller to benefit from an upturn and speak to its strong, well-run business. That should lead to a rising stock price and a rising dividend.
WTI Crude Oil Spot Price data by YCharts
However, at this point, Devon Energy's share price hasn't really responded quite as well to rising oil prices as you might expect. That could make now a good time to buy it, but only if you are a more active investor.
Devon is not for everyone
Most conservative dividend investors will be better off with a stock like Exxon. However, the performance-linked dividend offered by Devon Energy could be viewed as something of a hedge against volatile energy costs. Basically, when your energy costs are rising, it is highly likely that Devon Energy's dividend will, too, helping offset the hit to your monthly finances.
With WTI prices up and Devon's stock lagging behind, more aggressive investors looking for an energy hedge might want to examine the stock before improving financial performance leads to dividend hikes.
