Devon Energy (DVN) stock is attractive given its 3.8% dividend yield, especially as the adjustable dividend looks secure here. Also, short sellers of its out-of-the-money puts are making additional income. One reason is that DVN stock has been stable over the past month.
For example, at $51.38 per share in morning trading on Sept. 12, DVN stock is up from $48.84 on Aug. 24, almost three weeks ago. We wrote about this in our Aug. 25 Barchart article, “Devon Energy Stock Remains Attractive with its 3.88% Dividend Yield.”
Dividend Looks Secure
Given that the price of oil has been fairly stable during Q3, we might expect that the adjustable portion of Devon Energy's quarterly dividend could be reasonably stable.
After Q2's results, Devon paid a 20-cent quarter fixed dividend and a 29-cent variable dividend. The variable portion of the dividend was based on 50% of the quarterly adjusted free cash flow (FCF) after prior dividend payments.
That puts the annualized dividend payment at $1.96 per share (i.e., (20 cents + 29 cents) = $0.49 x 4 = 1.96). So, at today's price of $51.64, the ongoing dividend yield is 3.80%.
You can also see that even if the adjustable portion were to fall by 10% to 26 cents, the overall dividend yield is still reasonably high. For example, 20 cents + 26 cents equals a quarterly dividend of 46 cents, and an annualized payment of $1.84.
That is only 6.1% lower than the Q2 annualized dividend. Moreover, the yield is still high at 3.58%.
On the other hand, a 10% increase in the adjustable dividend portion (32 cents) raises the overall annualized rate to $2.08 per share. That brings the forecast yield to just over 4.0%.
This shows that with higher oil prices, DVN stock could be seen as undervalued.
Shorting OTM Puts for Extra Income
Last month we wrote that the Sept. 15 expiration put options were attractive to short sellers. The $47.50 strike price puts were selling for 48 cents per contract.
That meant that a short seller could make a 1.0% yield with just three weeks to expiration. This is seen by dividing $0.48 by the $47.50 strike price. On an annualized basis that works out to a 17% return, assuming the trade could be repeated every 3 weeks.
The good news today is that those puts are trading for just 3 cents per contract and there are only a few days left until expiration. Often it makes sense to just roll this kind of play over to the next expiration period. To do this the trader must buy back the shorted puts by entering in an order to “Buy to Close.”
Now the Oct. 6 expiration put option chain shows that the $48 strike price puts trade for 41 cents and the $49 strike price puts are at 64 cents.
This means that a short seller of these out-of-the-money puts would make a yield of 0.85% for the $48 strike price short play and 1.306% for the $49 short put trade.
That can be seen by dividing 41 cents by the $48 strike price and dividing 64 cents received by the $49 strike price.
Keep in mind that these strike prices are still between 4.6% and 6.54% below today's spot price of $51.64. So, traders might want to play a mix of both the $48 and $49 strike price short put plays. As a result, the average yield would be 1.078% with an even mix.
That works out to a similar return as last month, with an annualized return of over 18% if this trade can be repeated every 3 weeks. Keep in mind that the investor would have to spend a small amount to buy back the prior trade, so the return would be slightly lower.
Nevertheless, this shows that there is ample room here to make extra income by shorting OTM puts in DVN stock. For existing shareholders in DVN stock, this is the safest way to increase income since the trade does not risk having to sell existing shares that an investor holds.
Moreover, even if DVN stock falls to the strike price levels, the investor gets to keep the income already received. That lowers the breakeven price. It also means that an investor might be able to lower their average buy-in cost if the puts are exercised.
The bottom line is that DVN stock looks attractive here to long-term investors.
On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
