Devon Energy (DVN) stock has risen over 16% since mid-March to $53.80 early on April 10, up from $46.15 where it closed on March 17. However, DVN stock is still attractive to value investors despite the likelihood of a dividend cut with its Q1 earnings release in early May. Despite a potential dividend cut, income investors are still shorting its puts for extra income.
As it stands today, the ongoing dividend is 89 cents quarterly, including a 69 cents variable dividend. That puts the DVN stock dividend yield at 6.6% (i.e., $3.56/$53.80).
However, management has said that its capex program will be significantly higher in 2023. That lowers the amount of free cash flow available for dividend payments.
I discussed this possibility in my last Barchart article on March 20, “Devon Energy Stock Is Down, Making Its High Yield And Short Put Plays Popular.” There is a possibility of a 25% cut to the variable portion of the quarterly dividend to 52 cents. After adding in the fixed portion of 20 cents, the potential quarterly dividend would be 72 cents per share or $2.88 on an annualized basis.
This means that the annualized dividend yield would still be over 5.35% (i.e., $2.88/$53.80). Moreover, it also makes sense for these investors to short out-of-the-money put options for additional income.
Short Put Income Trades with DVN Stock
In our last article, we described the April 14 expiration $38.00 strike price puts which traded for 37 cents per put contract. That provided an immediate 0.97% yield to the investor with just 28 days to expiration. These are now worthless even with a few days left to expire. So the investor made a good income trade with this short put trade.
At that point, the strike price was almost 18% below the spot price. Given how well this performed, we can probably take more risk going forward and short at an out-of-the-money (OTM) price that is closer to the spot price.
For example, today the $48.00 strike price for expiration on May 12, which is 32 days from now, trades at an attractive premium. This strike price is just about 10% below today's price, but the premium trades at 79 cents. That provides an immediate 1.65% yield (i.e., $0.79/$48.00).
This means that the investor who secures $4,800 in cash and/or margin with their brokerage firm, can do this trade. They enter in an order to “Sell to Open” one put contract at $48.00. The brokerage account will immediately receive $79.00. As a result, the yield is 1.65% (i.e., $79/$4,800). In fact, if this trade can be repeated every month for 12 months, its annualized yield is 19.75%.
Moreover, DVN stock would have to fall to $47.21 before the investor would have an unrealized capital loss. That represents downside protection of 12.2% from today's price of $53.80.
This shows that investors in DVN stock can also enhance their high dividend yield by shorting out-of-the-money puts. Even with a 25% cut to the variable portion, the dividend yield is 5.35%. But with the additional 1.65% short put monthly income representing a 19.75% annual rate, the investor could make an annualized return of 25.1%.
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.
