Forget the State Pension or a Cash ISA! I’d live off BP and Royal Dutch Shell’s 7% yields

Harvey Jones says FTSE 100 (INDEXFTSE:UKX) dividend heroes BP plc (LSE: BP) and Shell plc (LSE: RDSB) can turbo-charge your retirement.

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The State Pension isn’t enough to give you a comfortable retirement and saving money in a Cash ISA won’t help much, as most now pay less than 1% a year. FTSE 100 oil giants BP (LSE: BP) and Royal Dutch Shell (LSE: RDSB) look far more tempting as they both yield nearly 7% a year. Both are worth buying – just make sure you understand the risks as well as the rewards.

Crude facts

It already seems an age since the oil price surged in the wake of the drone attacks on Saudi Arabia Aramco facilities, which led to dire predictions of $300 oil. Crude has now fallen to a two-month low, with Brent comfortably below $60, as Saudi officials report that production has been restored to pre-attack levels. 

The BP share price is sliding as a result, and so is Shell. Soft global economic data isn’t helping, while US crude stockpiles have just registered a third straight weekly climb. 

With supply continuing to outweigh demand, BP is down almost 20% this year, while the Shell share price is off more than 15%. They have disappointed over five years as well, with BP up just 10% in that time, and Shell down 4%. The FTSE 100 rose around 15% over the same period.

Dividend income heroes

The good news is that both now offer healthy dividend streams, regardless of where their share prices go. BP currently yields 6.7%, with cover of 1.2, while Shell yields 6.6%, covered 1.5 times. These are comfortably above the FTSE 100 average yield of around 4.5%, although Shell has struggled to raise its dividend lately.

BP and Shell are also trading at a discount, 12.3% and 12.7% times earnings respectively, against the FTSE 100 average of 17.17 times. These look like bargain prices.

There are so many companies on the FTSE 100 in this position, which makes now a great time to pick up dividend stocks and hold them for the long term to give your retirement plans a real boost. Share price growth on top would be a bonus.

Climate challenge

After years of denial and delay, big oil now has to face up to the challenge of climate change, as solar and wind prices tumble, and motorists switch on to electric cars.

BP is steadily remodelling itself, exploring everything from car charging networks to solar plants to biofuels. Some of these could deliver lucrative new income streams, others could swallow huge sums of cash and sink. Relying purely on oil and gas is no longer an option, so the challenge has to be met. Otherwise the backlash could be brutal.

Shell plans to double the amount it spends on green energy to £3.2bn a year. There is a long road ahead, though.

Major investments

Shell remains the largest stock on the FTSE 100 with a market cap of £185bn; BP is in fourth place with £99bn. The world still runs on oil, even if we would rather it didn’t.

BP is mostly over the Deepwater disaster and its earnings are forecast to rise 10% this year and 15% next. Shell looks patchier, with a forecast 16% drop in earnings this year, followed by a 24% rise in 2020. I still think both still merit a place in a well-balanced portfolio, and should keep your retirement income flowing nicely.

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.

Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

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