Better Buy: Devon Energy vs. Enterprise Products Partners

Which is the better option, the 9.6% dividend yield on offer from Devon Energy (NYSE: DVN) or the 7.6% yield from Enterprise Products Partners (NYSE: EPD)? The truth is that you can’t actually answer that question without additional information, but here’s a hint: Dividend investors shouldn’t always pick the highest yield.

The basics

While both Devon and Enterprise operate in the energy sector, they are each focused on a specific area. Devon is an energy producer that drills for both oil and natural gas in North America. Enterprise is one of the largest midstream players in North America, with a massive portfolio of energy infrastructure like pipelines and storage assets. The difference between these two industry segments is huge.

Devon’s top and bottom lines are directly tied to the commodities it produces. For better or worse, oil and natural gas prices are prone to dramatic and sometimes swift price changes. There’s a cyclical component as well, since energy demand tends to rise and fall, at least at the fringes, along with economic activity. All in, Devon’s financial results can swing wildly from year to year with high oil prices generally associated with strong earnings and low oil prices associated with weak earnings.

Load Error

Enterprise Products Partners, on the other hand, simply helps energy companies move oil and natural gas (and the products into which they get turned) from where they are drilled to where they are consumed. It charges fees for the use of its assets, so demand for energy is far more important than commodity prices. And while demand does ebb during economic weakness, the drop is normally not so large that it materially impacts infrastructure companies like Enterprise.

Dividend policy

Given that backdrop, it will probably make complete sense to investors that Enterprise has managed to increase its distribution annually for 24 consecutive years. Although the distribution has tended to grow slowly, regular fee increases, capital investment, and the occasional acquisition have led to an expanding footprint and improved distribution-paying capacity. It is a slow and steady income stock that won’t excite you, but that you can count on it to keep paying through good times and bad. The yield, in fact, is likely to make up the lion’s share of your return over time.

Devon Energy is almost the polar opposite. Its financial results fluctuate as dramatically as energy prices. And it has decided to tie its dividend payments to that performance to ensure that investors are rewarded well when oil prices are high. The downside to that, as the graph above shows, is that when oil prices weaken financial performance declines and, thus, the dividend shrinks.

That dividend policy is perfectly reasonable and some might even argue very shareholder friendly. However, investors simply can’t rely on the dividend yield when making an investment choice here. The next quarterly dividend could be higher or lower than the last one paid and examining the yield will likely be misleading since it will change with the next payment, perhaps dramatically.

Devon Energy’s dividend peaked in the third quarter of 2022 at $1.55 per share. The dividend in the second quarter of 2023 is pegged at $0.72 per share, less than half the level just three quarters earlier. Compounding the dividend cuts is the fact that Devon’s share price tends to rise and fall along with oil prices, too, so not only did investors receive materially less dividend income but they also suffered a loss of capital from the peak dividend period. As the chart above shows, Enterprise’s distribution and unit price just chugged boringly along, comparably speaking.

The tortoise wins, but…

For dividend investors who are trying to live off of the income generated by their portfolios, Enterprise is clearly a better option than Devon Energy. Simply put, if consistency counts for you, don’t buy Devon. So, all in, despite a huge dividend, investors probably shouldn’t look at Devon as a dividend stock.