I like to own boring dividend stocks. That means I like companies whose standout feature is how many years in a row their dividends have been increased, often expressed in decades. This is the basic reason Devon Energy (NYSE: DVN) will never find its way into my portfolio. But I have to admit that, for some investors, this company’s dividend approach, which churns my stomach, might be just right. Here’s what you need to know.
Please give me a 10-foot pole
I normally don’t even start looking at a company until it has increased its dividend annually for at least a decade. I make exceptions on rare occasions, but even then my preference is for companies that have long and consistent dividend records. The goal is to find a company that hasn’t cut its dividend in a long time, or for which the cut is for some larger purpose with which I’m less concerned, like a spinoff.
I wish I could say this was something I came up with on my own. I’m standing on the shoulders of giants like Benjamin Graham, the man who helped to train Wall Street legend Warren Buffett. In Graham’s seminal book The Intelligent Investor, he specifically tells conservative investors to focus on companies with strong dividend histories. It’s a quick and dirty way to ensure that the company has a strong business and that management places a high value on its shareholders.
That brings us to Devon Energy. Over the past eight quarters, this energy company has increased its dividend four times and cut it four times. That’s just not right for someone like me, who’s trying to build a portfolio that produces a reliable income stream. To give an even more dramatic example of the risk I’d have to accept in owning Devon, the quarterly dividend at the low point over the past two years was $0.49 per share, with the highwater mark at $1.55. That’s just too much variability for my taste, and I’d like to keep this one even further away than a 10-foot pole would allow.
But Devon Energy isn’t a bad company
Yet I have to admit that Devon Energy is actually a fairly well-run energy company. For example, it’s one of the largest U.S. onshore energy producers. The company believes it has around 12 years’ worth of drilling opportunities in its portfolio to support production and growth. And it has breakeven costs of around $40 a barrel of oil, which is pretty low. From this perspective, Devon is an attractive company.
The problem is that it has a variable dividend policy that ties the dividend to the company’s financial performance. That, in turn, will rise and fall with oil and natural gas, the commodities it produces, which are highly volatile. While I’m not fond of this approach, it is a fairly direct way to ensure that shareholders benefit from energy price upturns. Of course, that requires taking the hit when energy prices inevitably fall.
But think about that for a second. Right when you’d be facing rising energy prices for gasoline and home heating, Devon Energy’s dividend would probably be heading higher, too. That makes Devon something of a hedge for your real-world energy costs. More active investors might actually find that appealing. It’s not for me, but it might be just perfect for some investors.
In the eye of the beholder
Devon Energy’s dividend yield, which is around 6.6% today, almost doesn’t matter, given the variable dividend policy. You just can’t count on that dividend to stay the same. And that’s why I’ll never own this stock. But beauty, as they say, is in the eye of the beholder. And that variable dividend could actually be just what you need to balance out the variable energy costs you face in filling your car and heating your home.
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Reuben Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
1 Stock I Wouldn’t Touch With a 10-Foot Pole was originally published by The Motley Fool