Multiple studies have shown that over the long term, dividends account for around 50% of equities returns. This considerable contribution to your portfolio means that you just can’t ignore dividend stocks.
Of all the dividend plays out there, Royal Dutch Shell (LSE: RDSB) is one of my favourites. The oil behemoth has a tremendous dividend record, having paid one every year since the Second World War and management’s actions during recent years, as the price of oil has plummeted, shows that the company is committed to maintaining this record no matter what.
Taking action
When oil prices started to fall, Shell’s management immediately jumped into action. The group slashed capital spending, cut operating costs and introduced an all-share (scrip) alternative to the cash payout, which removed some pressure from cash flows.
To make the most of the prevailing environment, it also pounced on smaller peer BG Group, a $50bn deal that attracted plenty of criticism at the time, but now looks to have been a stroke of genius.
The enlarged Shell is now one of the primary hydrocarbon producers and traders in the world. At the end of November, management announced that the company would discontinue its script payout as efforts to control costs over the past few years start to pay off.
Cash cow
At an investor presentation at the time, Shell’s CEO announced that the group now expected to generate between $25bn and $30bn of annual free cash flow by 2020 assuming a relatively modest oil price of $60 a barrel. Previously, the company had been forecasting only $5bn of free cash flow during this period.
These figures give me confidence that the company can maintain its current dividend yield of just under 6% and possibly increase it in the years ahead. And even if the payout is not raised, shareholder returns are expected to rise as management is planning to buy back at least $25bn of shares between 2017 and 2020 — a promise made at the time of the BG takeover.
Monopoly income
I’m also positive on the outlook for Manx Telecom (LSE: MANX) as a dividend stock. Unlike Shell, which has been held hostage by the global oil market, Manx operates a monopoly telecoms business on the Isle of Man. The company’s monopoly position means cash flows are relatively stable, and management can plan ahead for the dividend.
Shares in Manx yield around 6% and the payout, which amounts to £12m a year, is easily covered by cash generated from operations, which was £22m last year. Next year, the company is expected to see a £3m boost to profits after a multi-year transformation completes and management is also branching out overseas.
In December last year, Manx won a deal to provide roaming services to China Unicom, one of the world’s largest telecoms companies, to sell SIM cards to Chinese tourists. As well as this landmark deal, it sells a SIM card called Chameleon in the UK that roams networks to find the best signal for customers. These two initiatives (as well as its established base on the Isle of Man) should help the company grow steadily in the years ahead, and this growth should filter through to the dividend — great news for shareholders.
