Devon Energy (NYSE:DVN) shares have displayed robust performance, thanks to their current dividend yield of 3.88%. The recent surge in oil and gas prices suggests the potential for increased cash flow. The combination of fixed and variable dividends offers stability in this regard.
Presently, Devon maintains a fixed quarterly dividend of 20 cents along with a variable dividend of 29 cents, which is contingent on 50% of the adjusted quarterly free cash flow (FCF) following prior dividend disbursements. This structure results in an annualized dividend payout of $1.96 per share.
With the current stock price at $50.47, investors in DVN stock enjoy an annualized dividend yield of 3.88%, assuming that the adjusted FCF remains consistent with Q2 figures.
Sustainability of Variable Dividend
The company’s dividend announcement, lower than Q1, was made on August 1st. At that time, DVN stock was valued at $50.62, indicating that the stock price has held steady since the dividend declaration. This stability can likely be attributed to investors’ optimism concerning the resilience of oil and gas prices throughout Q3. Consequently, there is hope that Devon will not reduce or only slightly lower its dividend.
This underscores the present sustainability of its dividend yield and also provides traders with the opportunity to generate additional income by engaging in short-selling of out-of-the-money (OTM) put options.
Enhancing Income through Shorting OTM Puts
For instance, a previous article suggested the potential value in shorting puts with a strike price of $47.00 expiring on September 1st. Back then, the premium was 33 cents with a mere 21 days left until expiration.
As of today, these puts have significantly decreased in value to only 6 cents per put option for the $47.00 strike price. Consequently, those who engaged in short-selling these puts have realized substantial profits.
A strategic move would be to repurchase these puts by placing a “Buy to Close” order, followed by initiating a new “Sell to Open” order for puts expiring further out. For instance, the $47.50 strike price puts expiring on September 15th are priced at a premium of 48 cents. This signifies a potential yield of slightly over 1% in a span of 3 weeks.
Calculating the Annualized Rate of Return
The yield-to-expiration in this scenario is derived by dividing $0.48 by $47.50, resulting in a yield of 1.01%. To engage in such a trade, an investor would allocate $4,750 in cash and/or margin per shorted put with their brokerage firm. Consequently, short-selling 3 puts would involve submitting $14,250 to the brokerage account.
Upon executing a “Sell to Open” order for 3 puts at the $47.50 strike price with a September 15th expiration, the investor immediately secures $144.00 in the brokerage account (3 x $48.00).
Impressive Annualized Yield for Value Investors
This approach allows investors to earn an immediate 1%, as $144 equates to 1.01% of the $14,250 invested in the trade. Notably, this sum will be utilized to purchase 300 shares of DVN stock if the price falls to $47.50 at any point over the next 3 weeks.
For value-oriented investors, the annualized yield becomes highly attractive, translating to 17.17%. This calculation is based on approximately 17 three-week periods in a year, each yielding 1.01% (17 x 1.01% = 17.17%).
It’s worth noting that the $47.50 strike price represents a 5.75% reduction from the current spot price. For those seeking a more cautious approach to income augmentation, the $47.00 strike price puts offer a premium of 38 cents, yielding an 80.8 basis yield or 13.75% on an annualized basis.
The Takeaway
By engaging in short-selling of these OTM put options, investors can bolster their income while maintaining their long positions in DVN stock. Additionally, this approach provides an avenue for potentially purchasing shares at a lower price if the puts are exercised upon reaching the strike price upon expiration.
Featured Image: Megapixl @ 4kclips
