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Devon Energy (NYSE: DVN) stock has tumbled quite a bit so far in 2023. Putting that performance aside, however, it’s been an income investor’s dream over the last three years. The stock is up more than 4.5x during the period. Devon’s dividend payout ranked as one of the best in the S&P 500.

Income investors now have more to like: Devon Energy’s ultra-high dividend yield just became even juicier. Here’s why.

Devon’s Q3 results

Devon released its third-quarter results after the market close on Nov. 7. The chart provides a visual picture of the company’s latest earnings numbers.

Data source: The Motley Fool.

The company’s Q3 net earnings (including earnings attributable to noncontrolling interests) plunged 51.6% year over year to $920 million. Excluding noncontrolling interests, Devon’s net earnings came in at $910 million, or $1.42 per share, down from $995 million, or $1.53 per share, in the prior-year period.

Lower profits might seem to be problematic. However, Devon’s story wasn’t as bad as it looks at first glance. For one thing, the company’s bottom line improved significantly from the second quarter of 2023. Also, Wall Street focuses on adjusted earnings that factor out nonrecurring costs and pre-tax expenses. Devon posted adjusted earnings per share of $1.65, higher than the consensus estimate of $1.56 per share.

However, the bad news was that Devon missed analysts’ expectations on the top line. Wall Street was looking for Q3 revenue of around $4 billion. Devon reported revenue of $3.8 billion.

Devon’s most important metric for income investors

There’s another metric that’s the most important one for income investors — and it won’t be found on Devon’s income statement. I’m referring to free cash flow.

Free cash flow matters so much because of Devon’s unique dividend program. The oil producer’s dividend includes a fixed component and a variable component. The variable part of its dividend fluctuates based on how much excess free cash flow the company generates.

So how did Devon’s free cash flow look in Q3? Very good. The company generated $843 million of free cash flow, more than 158% higher than the amount in the previous quarter. Granted, this reflected a sharp decline from the free cash flow of nearly $1.5 billion generated in the third quarter of 2022. However, Devon’s latest results reversed a slide that’s gone on for four consecutive quarters.

Higher free cash flow translates directly to a juicier dividend. Devon declared a fixed-plus-variable dividend of $0.77 per share, payable on Dec. 29, 2023. This dividend is a whopping 57% higher than the payout in the second quarter of 2023. Devon’s dividend yield now tops 11.3%.

More good news ahead?

Devon Energy president and CEO Rick Muncrief said in the press release announcing the Q3 results that the company plans to focus its investments in 2024 in the Delaware Basin. He stated that this shift represents a more efficient use of capital. Muncrief added that Devon is “well positioned to generate growth in free cash flow that can once again be harvested for shareholders.”

Those words should be music to income investors’ ears. And there’s some icing on the cake, too. Devon has also used some of its free cash flow on stock buybacks. The company has already repurchased around 40 million shares for $2.1 billion.

Devon is on track to reduce its number of outstanding shares by as much as 9%. Stock buybacks are basically an “invisible dividend” that rewards shareholders by boosting the value of the shares they own.

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Keith Speights has positions in Devon Energy. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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