Scott Levine
When it comes to income investors, ultra-high-yield dividend stocks like Devon Energy (DVN -0.25%), a leading upstream energy company, are always in the spotlight. Devon Energy has a history of delivering dividends that fluctuate, thanks to its unique policy of returning a fixed amount and a variable amount to investors, which was the first of its kind in the industry back in 2021. Apart from the fixed quarterly dividend of $0.20 per share, Devon Energy plans to return up to 50% of its free cash flow.
What makes this approach even more appealing is that it showcases management’s prudence in maintaining the company’s financial stability. By retaining a significant portion of its free cash flow, Devon Energy can reduce its debt and reinvest in the business through acquisitions and infrastructure improvements. As of the end of the third quarter of 2023, Devon Energy had a net debt to EBITDAE ratio of 0.7.
Not only is Devon Energy’s stock currently valued at a meager 7.6 times trailing earnings, significantly lower than its five-year average P/E ratio of 23.9, but it is also trading at 4.3 times operating cash flow, lower than its five-year average ratio of 5.1. While the dividends are subject to oil price fluctuations, income investors can still consider Devon Energy as a means to diversify their passive income portfolio and enjoy substantial returns when energy prices surge.
Lee Samaha
Before making any investment decisions, it is imperative to consider the bear case, even for an attractive stock like Devon Energy. The fortunes of oil and gas exploration and production companies, including Devon Energy, are heavily influenced by oil prices. This fact is particularly evident in Devon’s third-quarter earnings presentation, which highlights the company’s sensitivity to oil prices in terms of free cash flow and dividends. While this is a crucial aspect, investors should exercise caution if their portfolio already has a significant exposure to energy-related stocks.
Furthermore, it is essential to acknowledge that the decrease in gas prices over the past year has played a significant role in reducing Devon Energy’s dividend through 2023. Additionally, the historical trading patterns of Devon Energy point to a correlation with the price of oil, rather than the dividend yield supporting share price. As a result, investors must be prepared for potential share price volatility if they choose to invest in Devon Energy.
There is no one-size-fits-all dividend stock that suits every investor’s preferences. Those who are comfortable with Devon Energy’s dividend taking a hit when oil prices decline may want to delve deeper into the advantages of including this exploration and production company in their holdings. On the other hand, investors who prioritize generating a steady stream of passive income may prefer to steer clear of Devon Energy and focus on more dependable options, such as companies that have earned the distinction of being Dividend Kings.