High Yield From Big Oil

Stephen Bland selects Shell as the twelfth share for his latest high yield portfolio.

This month's share is Shell, to be precise Royal Dutch Shell (LSE: RDSB) B shares being the sterling currency side of the company's share capital, both capital and dividends, in contrast to the A shares which are denominated in euros and consequently disadvantageous for UK based investors.

Here is the current standing of HYP3 including this latest addition. For the information of newcomers, I have assumed £5,000 invested in each share, as with my previous HYPs, and allowed for purchase costs.

Shell takes the portfolio into the hole in the ground sector, a highly desirable group of shares for some representation in an HYP even if a chunk of yield has to be sacrificed to deliver this, because the sector is such a large one within the FTSE 100. I am quite prepared to include more than one mining share in an HYP, even in a portfolio as small as 15 holdings which was the original size of my HYPs 1 and 2.

I don't think Shell needs any introduction from me. Alright then, for anyone residing on the planet Zog, it's an oil major. Then again if you do live there I advocate that you don't buy foreign shares anyway. Go for Zog Oil instead.

For the year to 31/12/06, consensus forecast dividends are 67.8p followed by 71.1p for 07. This gives forecast yields of about 3.48% and 3.65% respectively on my total buy price above. A little above the big cap average of around 3% but well below the interest rate available on cash right now. Shell has always been stingy with dividends despite having modest gearing and is as solid as they come for an HYP share in my view, even though it is in the volatile oil business. Dividend cover is forecast at between 2 and 3, substantially in excess of most other big caps and thus adding to the quality of the payout.

In HYP1 which I set up back in November 2000 Shell was included not on yield grounds, which at the time was only about 2%, similar to the index average, but simply to have an oil share in the portfolio for the sake of diversification. Now though with the yield at the current level the shares warrant inclusion for income reasons as well as for the purpose of sector spreading. With yields as they are right now, any portfolio of any size will have to get down to the present Shell yield level if it is sticking primarily to FTSE 100 companies.

Some beginners may question the point of having an HYP share with a yield below cash. The first reason is that it is the yield on the whole portfolio that counts, not the individual constituent yields. A high yield portfolio is defined as giving a yield in total well above the market average at the time of construction, even though some shares in it do not. They will be balanced by the very high yielders. Secondly, cash cannot increase in value. Whilst that may be seen as a good thing by some, this is not so for an HYP investors. HYPers actually desire exposure to the risk of holding volatile equities in preference to non volatile cash and trade that risk against an anticipated long term growth of both income and capital though there cannot be any guarantee of course. Finally, share dividends carry a substantial income tax advantage over interest.

Of the shares shown Stephen owns Alliance & Leicester, BT, DSGI, Lloyds TSB and United Utilities.