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Why Devon Energy Might Not Be the Right Fit for Every Investor Investor Beware: Approach Devon Energy with Caution

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I seek out mundane dividend stocks, known for increasing dividends consistently over decades. Thatโ€™s why Devon Energy is not my cup of tea. Nevertheless, for certain investors, the companyโ€™s dividend strategy might align with their investment goals. Hereโ€™s the lowdown.

Why this stock is not on my radar

I typically consider companies that have raised dividends annually for at least ten years. I occasionally make exceptions, but I strongly favor firms with lengthy and unwavering dividend track records. This criterion ensures that a company boasts a robust business and values its shareholders, as advocated by investment luminary Benjamin Graham in The Intelligent Investor. Devon Energy, however, has raised its dividend four times and slashed it four times over the last eight quarters, unsettling for someone like me aiming to construct a steady income-generating portfolio. To illustrate the risk, the companyโ€™s quarterly dividend plummeted to $0.49 per share at one point in the past two years, and peaked at $1.55. This level of flux is unpalatable to me, warranting that I steer clear of the stock.โ€

A pile of papers with percentages and one on top of the pile with a question mark.

Image source: Getty Images.

Though I wish I could take credit for this principle, it is rooted in the wisdom of investment gurus like Benjamin Graham, who tutored the legendary Warren Buffett. Graham, in his influential book, endorsed conservative investors to focus on companies with sound dividend histories as a quick check for a companyโ€™s strength and the managementโ€™s regard for shareholders.

Behind the scenes: Devon Energyโ€™s business acumen

Despite these concerns, itโ€™s important to acknowledge that Devon Energy is a well-managed energy company, standing as a significant U.S. onshore energy producer. The company has a portfolio indicating 12 yearsโ€™ worth of drilling opportunities poised to sustain its production and growth. Additionally, with breakeven costs hovering around $40 per barrel of oil, the company appears financially sturdy.

However, its variable dividend strategy, linked to the companyโ€™s financial performance which, in turn, mirrors the fluctuating prices of the commodities it produces, namely oil and natural gas, adds substantial volatility. This correlation means that as energy prices peak, so does Devonโ€™s dividend, but it also declines when energy prices ebb, a facet I find unappealing. Nevertheless, it serves as a direct method for shareholders to relish gains from the upturns in energy prices, albeit at the expense of enduring the inevitable downturns.

Consider this: When youโ€™re grappling with escalating energy prices for fuel and heating, Devon Energyโ€™s dividend would likely be soaring in parallel, effectively positioning Devon as a hedge against your real-world energy expenditure. Though not my cup of tea, more active investors may find this proposition alluring.

The subjective nature of investments

Notwithstanding Devon Energyโ€™s current dividend yield of approximately 6.6%, the variable dividend policy overshadows its appeal, making it unreliable. This is why I donโ€™t see myself holding this stock. But as the adage goes, beauty is in the eye of the beholder. For some investors, the variable dividend could provide a balancing factor to navigate the erratic energy costs associated with fueling and warming your home.

Should you invest $1,000 in Devon Energy right now?

Before diving into Devon Energy, consider this:

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Reuben Brewer holds no position in any of the stocks mentioned. The Motley Fool does not have a position in any stocks mentioned. The Motley Fool maintains a disclosure policy.

The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.

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