Devon Energy (DVN 0.19%) is an onshore U.S. energy producer with a 6.5% dividend yield. That may lead income investors to consider the stock, given that the average energy stock, using Vanguard Energy Index ETF (NYSEMKT: VDE) as a proxy, has a yield of just 3.5%. Only there's an important thing to consider about Devon Energy before you buy it if you are looking to live off of the income your portfolio generates.
Devon Energy has a lot of positives
One of the first things that investors need to understand about Devon Energy is that it is solely focused on the upstream portion of the oil industry. So unlike an integrated energy company such as ExxonMobil, which has assets across the energy value chain, Devon only owns oil and gas production assets. That's the upstream sector, and it means that energy prices are effectively the driving force behind the company's financial results.
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Oil and natural gas are commodities and are prone to dramatic and often rapid price changes. So Devon's financial results can sometimes swing pretty wildly. As an example, in the third quarter of 2023, Devon's adjusted earnings were $1.62 per share. That was up from $1.18 in Q2. That's a big change in just a single quarter and it was largely driven by a spike in oil prices. But it gets more interesting because in Q3 of 2022, Devon's adjusted earnings were $2.18 per share, with the difference again driven by the prices of the commodities it produces.
Devon's stock price will roughly track energy prices, as the chart below shows, which might actually be what you want as an investor. And Devon is a well-respected energy producer. Notably, it has a roughly $40-per-barrel break-even point, which is strong. And it has over 10 years' worth of drilling inventory ahead of it. So far, so good, assuming you want to own an energy stock. The potential problem is that lofty dividend yield.
Devon's earnings and dividends go hand in hand
What's not to like about a solid energy company with an above-average dividend yield? The answer is the dividend policy, which is variable. Over the past two years, the dividend has been as high as $1.55 per share in the third quarter of 2022 and as low as $0.49 in Q3 of 2023. The dividend yield that you see listed for the stock really isn't a reliable gauge of the income you can expect to receive. If you are looking to create a consistent income stream off of which you can live in retirement, Devon Energy is probably best avoided.
That said, there is one situation where it might make sense to own Devon Energy. The company's dividend will, more or less, track the price of energy. So, when oil and natural gas are rising, the dividend will likely increase, and vice versa. That means you will collect more income from Devon just as you are facing higher costs for things like gasoline and heating fuel. Thus, it could be considered a hedge against real-world energy costs.
Not the best option for most investors
Although Devon's ability to help hedge real-world energy costs with its variable dividend policy is interesting, most investors probably don't think about investing in this way. As such, despite the company being a perfectly good upstream energy stock, most folks will probably want to err on the side of caution in this volatile sector and pick an energy option that offers a less volatile income stream. An integrated energy giant like ExxonMobil would likely be a better starting point, as it has increased its dividend annually for over four decades.
