The striker has been well down the pecking order at St Andrews, with Blues chief Steve Bruce saying he would be happy to let the Scottish international move on.
Devlin had been linked with a move to West Brom for much of the summer, but The Baggies' failure to firm up their interest left the way clear for The Hornets to step in.
Watford are in financial difficulties, with a mystery benefactor stepping in to pay the £150,000 transfer fee and Devlin's wages.
After sealing a deal for the 31-year-old, Hornets boss Ray Lewington said: "He's experienced and can give us that pace down the right that I've been looking for."
Watford chairman Graham Simpson has thanked the club's backer for helping tie Devlin to a three-year deal.
He said: "We are making every effort we can to ensure the current and future stability of the club, and that means we simply cannot afford to enter the transfer market unless we can elicit funds from other sources.
"So we're absolutely delighted to have a benefactor come forward in this way. In fact, everyone has played their part recently.
"Directors have provided funding and fans have shown their feelings and supported the 'Let's Buy Back The Vic' fund, as well as forming the Watford Supporters Trust which is committed to ensuring Vicarage Road remains Watford's home.
"Added to that, there are the players and staff who took a 12 percent wage deferral - something we're committed to repaying as soon as we are able."
The Hornets' Honorary Life President Sir Elton John helped the club recently by donating his fee for producing a promotional video for Sky Sports' football coverage to Watford's 'Let's Buy Back The Vic' fund, and he will have been buoyed by the signing of Devlin.
