If You Invested $10,000 in Devon Energy a Year Ago, This Is How Much You Would Have Today

If you bought Devon Energy (DVN 1.07%) one year ago you would have turned a $10,000 investment into roughly $6,500. That’s a very disappointing performance, but you need to make sure you really understand what’s going on before you pass any judgment here. Devon Energy is not a bad energy company, it just comes with different risks.

Devon’s basic business is strong, but it’s beholden to the price of oil

At its core, Devon is a pure-play producer of oil and natural gas with a focus on the U.S. market. It has paid a dividend every quarter since it started paying a dividend in mid-1993, showing a commitment to returning value to investors via reliable dividends. It has an investment grade rated balance sheet, highlighting that management is financially conservative. And its production costs are comfortably below the industry average, which suggests a strong operating model.

And still, the energy company’s top and bottom lines are almost entirely dependent on the price of these commodities. The problem with that is, while vital to the global energy picture, oil and gas are prone to huge price swings. And those swings often occur fairly rapidly. Put simply, Devon’s performance can be volatile at times despite it being a well-run energy producer.

IMAGE SOURCE: GETTY IMAGES.

Adding to the risk here, Devon recently adopted a variable dividend policy tied to the company’s performance. When energy prices are high it will pay out a larger dividend and when energy prices are falling the dividend will fall, too. So not only are the company’s revenue and earnings tied to oil, but so is the dividend. That can lead to investor sentiment shifts if dividends are trending lower like they are today, and it really leverages the stock to energy prices.

In fact, if you look at how a hypothetical $10,000 investment would have turned out over the past year, you can see that the downtrend tracks right along with the drop in West Texas Intermediate, a key U.S. energy benchmark. But, given the business model, that’s hardly shocking.

DVN DATA BY YCHARTS

Investors looking at Devon Energy’s nearly 9.5% dividend yield should keep all of this in mind. Not only is the stock likely to be just as volatile as energy prices, but that dividend yield really shouldn’t be counted on, either. The dividend backing it will change, noting the dividend has been cut for three quarters in a row at this point.

Devon isn’t the only game in town if you want to find a dividend-paying energy stock. Two other options are global integrated energy giant Chevron (CVX -0.81%) and North American midstream giant Enterprise Products Partners (EPD -0.17%). Chevron’s yield is roughly 3.8% and Enterprise’s yield is around 7.5%.

Clearly, those yields aren’t as large as Devon’s, but the dividends backing them have been much more reliable. Chevron has increased its dividend annually for 36 years while Enterprise’s distribution growth streak is up to 24 years. Those are quarterly checks you can count on.

DVN DATA BY YCHARTS

As the chart above shows, a $10,000 investment in Chevron one year ago would be worth roughly $8,900 today. The same money put into Enterprise would be worth nearly $9,800. The difference is largely found in the business models.

Chevron has a globally diversified business that spans from the upstream (drilling) all the way through to the downstream (refining). There’s inherent balance, as lower energy prices actually benefit downstream operations. A rock-solid balance sheet and a proven commitment to paying the dividend through the energy cycle (as opposed Devon’s choice of tying it to the cycle) also help support investor sentiment.

Enterprise, meanwhile, operates in the midstream niche, where its assets, like pipelines, generate reliable fee income regardless of energy prices. It basically sidesteps the energy sector’s volatility. Yes, the yields from Chevron and Enterprise are lower, but the income you’ll generate has, at least historically, been far more reliable.

Which energy stock to buy?

Devon Energy is a perfectly fine energy stock, as are Chevron and Enterprise. But they are all different and that difference is going to dictate who will want to own each of them.

Someone looking to leverage themselves to energy prices will probably prefer Devon over the other two options. An investor seeking out energy exposure while minimizing risk would likely favor Chevron. And income-focused investors who want a large but reliable quarterly check will probably like Enterprise the best.