Why dividend yields at Royal Dutch Shell plc and SSE plc are too good to be true!

Royston Wild explains why dividends at Royal Dutch Shell plc (LON: RDSB) and SSE plc (LON: SSE) are in severe peril.

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Today I’m looking at two Footsie giants that could be next to slash their dividends.

Out of spark?

I believe electricity play SSE’s (LSE: SSE) progressive dividend policy could find itself in the crosshairs sooner rather than later.

The utilities giant has continued to raise payouts in recent times despite increasing pressure on earnings. Indeed, SSE still lifted the dividend to 89.4p per share in the period to March 2016 — up from 88.4p a year earlier — in spite of earnings slipping 4%, the first bottom-line fall in many years.

And the City expects dividends to keep growing despite predictions of additional bottom-line troubles. Another 4% earnings drop is predicted for fiscal 2017, but the dividend is still anticipated to rise to 90.5p per share.

But I believe investors should take stock of SSE’s deteriorating revenues outlook before being drawn in by a juicy 5.9% yield.

SSE saw its customer base take another hit during the last year, the company losing a further 370,000 accounts as the steady rise of independent, cheaper suppliers weighed.

Around a dozen new suppliers sprang up during the last fiscal year, prompting extra rounds of tariff cuts from the Big Six operators desperate to protect their client bases. And further price-cutting can be expected as Britain’s switching culture clicks through the gears.

On top of this, SSE’s hulking capex bills are putting additional strain on its dividend outlook — indeed, net debt and hybrid capital surged to £8.4bn last year from £7.57bn in 2015.

I reckon the power play could find its proud dividend record put under significant stress should its customers continue to head for the exit.

Oil toils

Increasing top-line struggles also put payout projections at Royal Dutch Shell (LSE: RDSB) on thin ice, in my opinion.

The oil giant confounded many analysts last year by locking the dividend at 188 US cents per share. Sure, this may have put paid to Shell’s long-running progressive policy. But this was still considered something of an achievement given the firm’s tanking bottom line — earnings fell 87% year-on-year in 2015.

Shell has elected to keep shareholder rewards rolling through a steady stream of asset sales and cost reductions, a scheme that the City expects to maintain the dividend at around 188 cents in 2016. This projection yields a market-mashing 7.2%.

But with oil prices remaining on a precipice, I reckon Shell’s self-help measures could fail to stop dividends toppling in the near-term and beyond.

Sure, Brent may have reclaimed the $50-per-barrel milestone last month. However, signs that US rig operators are gradually getting back to work casts a pall over black gold values looking ahead, particularly as production cuts from OPEC and Russia are still to materialise.

And with Shell toiling under a $70bn debt pile, I reckon the fossil fuel giant may find it increasingly difficult to keep dividends running at market-mashing levels.

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.

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

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