Devon Energy (DVN 0.19%) has a very attractive dividend yield at 6.4%. That compares favorably to energy industry giants like ExxonMobil, which has a yield of just 3.7%. The average energy stock, meanwhile, has a yield of around 3.5%, using the Vanguard Energy Index ETF as a proxy. You need to know more about Devon Energy and its dividend before you buy here.
What does Devon Energy do?
Devon Energy is an onshore U.S. based energy producer. In other words, it drills for oil and natural gas in the continental United States, with exposure to five oil producing regions: the Williston Basin, Powder River Basin, Anadarko Basin, Eagle Ford, and Delaware Basin (which is in Texas, not Delaware).
There's no particular reason to be worried where the company operates and, in fact, being only in the United States reduces risk materially relative to a company with operations in foreign countries, given the political stability of this country.
Image source: Getty Images.
Devon is a fairly well-respected energy producer. For example, it has a modest break-even point of around $40 per barrel. That means that as long as oil is above $40, it can make money. It also has a long runway of future drilling opportunities, which it believes will last for over a decade.
Drilling for energy is hard work, and sometimes things don't go as planned, so any given quarter's operating performance will vary a bit. But overall, Devon tends to operate a strong business.
That said, what it produces is a commodity. There is no material difference between the oil and natural gas that Devon sells and what any other energy producer sells. So it basically has to accept the market price for its product.
Oil and natural gas are volatile commodities prone to material and often rapid price changes. That means that Devon's financial results can swing dramatically, sometimes in as little as a quarter.
Do you want to own a volatile dividend?
This is where things start to get interesting with Devon Energy. But it helps to put some numbers on the variability here. The company earned $1.43 per share in the third quarter of 2023 based on generally accepted accounting principles (GAAP). That was up from $1.08 per share in the second quarter, which is a big improvement.
But it was down from $2.89 per share in the third quarter of 2022, which means it was also quite a big drop. The big takeaway is that Devon Energy's earnings will fluctuate a great deal and often in a big way.
DVN dividend per share (quarterly), data by YCharts.
What about the dividend? Exxon has chosen to provide investors a growing dividend over time, often taking on debt to support the dividend when energy markets are weak. When the market recovers, Exxon pays down the debt it took on to prepare its balance sheet for the next industry downturn.
Devon has chosen an entirely different path, tying its dividend to its financial performance. So the dividend rises during the good times and falls during the bad times. You are effectively sharing more directly in the company's financial performance.
Thus, the dividend picture can change as dramatically as earnings, noting that the most recent dividend increase was a huge 57%. That brought the quarterly dividend to $0.77 per share. And yet the dividend is still less than half of the $1.55 per share it was in the third quarter of 2022, when earnings were so high.
Also, the dividend got as low as $0.49 in the second quarter of 2023. If you are trying to build an income portfolio with the idea that you will live off a steady stream of dividends, Devon probably won't be for you.
Who should buy Devon Energy?
And yet Devon can have a place in a diversified portfolio, if you think about it in the right way. Most people still have exposure to energy costs for things like gasoline and home heating. Given Devon's dividend is, in effect, tied to the price of oil and natural gas, it will likely rise just as you are facing rising energy costs. In that way, it can provide a hedge of sorts for the real world energy costs you are facing. For more active investors that could be an attractive investment thesis. But you have to go in knowing that you can't rely on the stock's dividend or read too much into that dividend yield.
