3 Things You Need to Know If You Buy Devon Energy Today

It's no secret that Devon Energy (DVN 0.19%) is a worthy candidate for income-seeking investors looking for exposure to the energy sector. Its trailing dividend yield is 6.3%, and if you annualize its last quarterly dividend of $0.77, its yield is even higher at 6.7%.

That said, it's not simply a case of just buying the stock and waiting for the dividends to roll in; there are three more important things to consider before buying in.

1. Devon Energy's dividend will vary with energy prices

It's been well documented that Devon's dividend varies with the price of oil and gas. For reference, it pays a base dividend of $0.20 and retains the flexibility to pay 50% of its excess free cash flow (which includes the base dividend) in the form of a variable dividend.

Since its earnings and cash flow are guided by its production and the price of energy, its overall dividend is also led by energy prices.

The question is: What kind of dividend yield can investors expect at what price of oil? Management shed some light on the matter in the third-quarter earnings presentation with a useful chart showing a range of oil prices and dividend yields based on the third-quarter operations. I've interpolated the data in the chart to today's stock price to produce the following table.

With the price of oil currently around $74.50, it's clear that Devon still has the potential to offer investors handsome dividends. 

Data source: Author's analysis based on Devon Energy data.

2. Devon isn't just about oil

Speaking about Devon's dividends, it's easy to forget the "gas" bit in the oil and natural gas company's operations and, ultimately, its dividend. In fact, as previously discussed, the crash in gas prices over the last year played a major role in the dip in Devon's quarterly dividend through 2023.

For example, Devon's realized oil price per barrel fell from $84.38 in the third quarter of 2022 to $79.81 in the third quarter of 2023. That's a decline of just 5.4% compared to the nearly 20% drop in its total oil equivalent realized price per barrel (a figure that includes Devon's gas and natural gas liquids) over the same period. In fact, its realized price of gas fell 66%, and its realized price of natural gas liquids fell 40%.

The good news is that the price of gas has stabilized through 2023. Still, it needs watching if you buy Devon stock, both on the upside and downside.

Henry Hub natural gas spot price; data by YCharts.

3. Devon Energy's reserves are growing

While the market focuses on the short-term movements in the price of oil, it's easy to forget that the long-term value of an energy company lies in a combination of its realized energy prices and its production from reserves.

As such, it's crucially important for exploration and production companies to grow their reserves. The key metrics to look at here are its growth in proved undeveloped reserves and its growth in extensions and discoveries. Devon scores well on both fronts.

The table shows that Devon consistently adds extensions and discoveries and good growth in proved undeveloped reserves. For reference, according to Devon, "proved" oil and gas reserves are "those quantities of oil, gas, and NGLs which can be estimated with reasonable certainty to be economically producible" from its known reservoirs under current conditions.

Data source: Devon Energy Securities and Exchange Commission filings. MMBoe: millions of barrels of oil equivalent.

A stock to buy?

All told, Devon Energy offers an excellent dividend yield, has a good track record of growing reserves, and has a good balance sheet. Now that gas prices have stabilized and, despite a slowing economy, the price of oil is still above $70, investors looking for exposure to energy have an excellent option to invest in with Devon Energy.