Why I’d buy the Shell share price and 8.6% dividend yield today

G A Chester discusses FTSE 100 giant Shell’s high-income appeal, and the attractions of a complementary FTSE 250 dividend stock.

| 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.

I believe FTSE 100 megacap Royal Dutch Shell (LSE: RDSB) is a very attractive high-income stock. But I’m also considering diversifying my dividends from the energy sector. With this in mind, I’ll discuss not only Shell in this article, but also FTSE 250-listed Greencoat UK Wind (LSE: UKW). I see this wind farm owner as a good option to sit alongside the oil giant.

Immediate outlook

As stock markets crashed last week, the price of oil also slumped, and Shell fell more heavily than the overall FTSE 100. As I’m writing today, stock markets, the price of oil, and Shell’s shares have recovered a little. However, at around 1,700p, the Shell share price is 16% below its pre-crash February high, and 32% below its 52-week high.

City analysts expect the company to maintain its dividend at $1.88 per share for 2020. At current exchange rates, this translates to 146p, and gives a glorious yield of 8.6%. The dividend would be covered 1.3 times by forecast earnings.

The dividend cover isn’t particularly strong, and this has been the situation for a number of years. Indeed, some years, earnings haven’t covered the dividend at all. For this reason, Shell’s annual payout has been stuck at $1.88 per share since 2014.

Looking to the future

My colleague Roland Head explained in an excellent article last year how Shell is managing the business for a future of lower worldwide oil consumption. It’s limiting spending on new oil projects, and maximising cash generation from its existing operations.

I can see the current strategy supporting the dividend for a good decade at least. However, in the long term, the company will need to tilt into other areas as oil consumption falls.

Shell hasn’t cut its dividend since World War II. However, if major merger & acquisition opportunities in new areas came along that management felt could help secure the company’s long-term future in light of declining fossil-fuel consumption, and such investment required rebasing the dividend, I believe management would do so (and be right to).

All in all, I see Shell as a good high-income buy. I think the dividend looks safe for the short and medium term – all else being equal – but with perhaps above-average risk of a future rebasing.

The future’s here already

Greencoat UK Wind, which released its latest annual results last week, is well positioned for the cleaner energy future. It’s the leading listed renewable infrastructure fund, invested in UK wind farms. As of the year end, its portfolio consisted of 35 operating wind farm investments.

Listed on the stock market in 2013, the company’s aim is: “To provide shareholders with an annual dividend that increases in line with RPI inflation while preserving the capital value of the investment portfolio in real terms.”

For 2019, the company declared total dividends of 6.94p per share. For 2020, its targeting 7.1p, an increase for the seventh consecutive year in line with RPI. At a current share price of 142p (up 1.3% on the day), the prospective yield is bang on 5%.

The company’s valued at £2.155bn, a premium of 17% to its net asset value. However, I think the premium is merited, given the low-risk nature of the business and reliability of its cash flows (and dividends). I rate it a ‘buy’ at this level, and a diversifying energy stock to hold alongside Shell.

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.

G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Greencoat UK Wind. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

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 »

View of Tower Bridge in Autumn
Investing Articles

The FTSE 100 is closing in on 8,000 points! Here’s what I’m buying before it’s too late!

As the FTSE 100 keeps gaining momentum, this Fool is on the lookout for bargains. Here's one stock he'd willingly…

Read more »

Investing Articles

3 ideas to help investors aim for a million-pound Stocks & Shares ISA

The UK has a growing number of Stocks and Shares ISA millionaires, and this plan may be one of the…

Read more »

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »