Most companies that pay dividends try to provide investors with a reliable income stream, setting a dividend that they believe can be sustained, if not grown, over time. Devon Energy (DVN 0.54%) has taken the exact opposite approach. So while the dividend yield on major quote services is listed as 4.9%, you shouldn't count on that figure. Here's what you need to know and why future dividends from Devon are anything but set in stone.
What does Devon Energy do?
Devon Energy is part of the energy sector, as its name implies, producing oil and natural gas from its onshore U.S. assets. It operates in the Williston Basin, Powder River Basin, Anadarko Basin, Delaware Basin, and Eagle Ford. Production increased by 8% in 2023 over 2022 levels. The company estimates that its break-even price in 2024 will be $45 per barrel or less, well below the industry average, which is closer to $55 per barrel. Management believes it has at least 10 years' worth of drilling opportunities ahead of it.
Image source: Getty Images.
Devon Energy's business looks like it is on fairly solid ground, and it also possesses an investment-grade balance sheet. The 4.9% dividend yield, meanwhile, is above the energy industry average of roughly 3.2%, using Vanguard Energy Index ETF (VDE 0.45%) as a proxy. But hold on a second before you hit the buy button.
Devon Energy's dividend yield is based on the last four dividend payments, which add up to $2.42 per share. Normally when you calculate a dividend, you take the most recent dividend and annualize it. The most recent quarterly dividend from Devon Energy was $0.44 per share, down from the prior quarter's $0.77. If you annualize $0.44, you get $1.76 per share, which results in a yield of around 3.6%. While that's still higher than the average energy stock, it's not nearly as attractive as 4.9%. What's going on?
What does a year of dividends from Devon look like?
Devon Energy has a variable dividend policy that is tied to its financial performance. Operating in the energy sector as an oil and natural gas producer, its financial results are directly tied to the price of the commodities it sells. Oil and natural gas are prone to swift and often dramatic price swings. So Devon Energy's financial results are volatile and so, too, is its variable dividend.
Some numbers will help illustrate this. In the first quarter of 2023, Devon's per-share dividend was $0.89. In Q2 2023, the dividend fell to $0.72. It declined again in the third quarter, hitting $0.49 before rising in Q4 to $0.77. The first-quarter 2024 dividend, as previously noted, was $0.44 per share. Now that's a lot of variability! And as the chart below shows, the dividend's ups and downs track along with the price of oil, with a slight lag.
DVN Dividend Per Share (Quarterly) data by YCharts
To be fair, the company has recently decided to shift priorities with regard to returning cash to shareholders. It is going to be putting additional emphasis on stock buybacks, which basically means less cash will go out in the form of dividends. But that doesn't change the nature of the dividend policy or nature of the company's business.
So the answer to the question of where Devon Energy's dividend will be in a year is, well, unknowable. Adding up the last four dividend payments, while not ideal, is probably the best that can be done to give investors a modicum of insight into the company's dividend. But there is one thing we do know for certain: Dividend levels in the future will be tied to the price of oil and natural gas (with a slight lag). That's not, perhaps, the answer a dividend investor wants to hear, but it is a very important one to understand.
If you are looking for consistent dividends, Devon Energy is not the energy stock for you. You will be better off with an integrated energy giant like Chevron (CVX 0.13%). Chevron has increased its dividend annually for 36 consecutive years and the yield is currently around 4.2%. Dividend consistency is an obvious goal for Chevron, but it is not for Devon Energy.
Devon Energy's dividend policy isn't bad
For some investors, Devon Energy's dividend policy will be unappealing. But that doesn't make it an inherently bad policy. In fact, it ensures that shareholders benefit directly when energy prices are on the rise. The problem is that it also requires investors to share the pain when energy prices fall and the dividend inevitably gets cut.
Before you buy Devon Energy, make sure you understand that there is no way to predict what the dividend payment will be, and therefore no way to really know how much income the stock will generate for you. What you do know, however, is that if energy prices go up, you will benefit from a rising income stream, perhaps offering you a hedge of sorts for the real-world costs of heating your home and filling up your gas tank.
