Do Super Dividends Make BP plc And Royal Dutch Shell Plc Into Screaming Buys?

BP plc (LON: BP) and Royal Dutch Shell Plc (LON: RDSB) are offering over 7%, so should we leap in?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

It seems like only yesterday that oil prices were plunging below $45 a barrel, with some City pundits even gnashing their teeth and warning us to expect $20 and worse! Well, the more ebullient of the world’s commentators always over-egg their claims (some were forecasting $200 a barrel at the height of the boom), and Brent Crude has climbed back around the $53 mark.

The more sensible of us don’t worry about short-term price fluctuations anyway, and instead look instead to rational valuations. To my mind, high-yielding dividends figure pretty high in the list of priorities — and our two big FTSE 100 oilies are offering some of the best on the market.

Dividends still growing

BP (LSE: BP) has maintained its dividend right throughout the oil price downturn. In fact, it’s continued to increase the cash it has handed back to investors, providing them with a 6.3% yield in 2014. With the share price down around 397p, forecasts for this year suggest a massive 7.4% — and that’s after the shares have put on 20% since the end of September, so the yield has actually fallen.

At Royal Dutch Shell (LSE: RDSB) we see something very similar. The share price has also recovered this month, to 1,834p as I write, but even with that we’re still looking at a forecast dividend yield of 7.6% for the year to December 2015 — which would maintain the annual cash at the same level as the past two years.

The downside is that these bumper dividends are not well covered by earnings forecasts. BP’s earnings per share would actually fall just short of its dividend prediction this year and would still be a penny short based on 2016 prognostications. But things look better at Shell, with modest cover of around 1.1 times for this year and next.

The question is whether the two companies will continue to hand over the cash while oil prices are low, and I think the answer is yes. At interim time, BP affirmed its commitment by announcing a 6.5p dividend for the second quarter, ahead of last year. Shell, meanwhile, did what was expected and kept its Q2 payout at the same level as a year previously in dollar terms (31p per share to UK investors).

More pain to come?

Weakening economic data suggest we’re not out of the woods yet, and some are fearing a renewed downwards spell for oil prices. But the total well count is falling and production is dropping, and that trend will surely continue while such a large portion of the world’s production faces unprofitable costs. The market will sort things out, as it inevitably does when there’s an excess of supply of anything — and in the case of oil, that excess is really pretty small.

I reckon September and October this year could well turn out to have been the time to get back into oil shares, and BP and Shell are among the safest long-term options there are — and who wouldn’t want more than 7% in cash?

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »