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Should I buy this 6%+ yielding oil stock instead of BP or Shell?

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When Royal Dutch Shell cut its dividend by 65% last year, it was the first time the FTSE 100 oil stock had reduced its payout since World War II. Shareholders (including me) got a rude awakening. Shell’s dividend wasn’t safe, after all.

It was a similar story at rival BP. CEO Bernard Looney held on a little longer. But by August, BP’s payout had also been chopped.

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The only big European oil stock that has held onto its high yield is Paris-based Total (LSE: TTA), whose shares currently yield around 6.5%. Should I sell my Shell shares and buy Total for a higher yield? It’s a change I’m considering. As I’ll explain.

The renewable question

One problem facing investors in oil stocks is that environmental concerns suddenly became more urgent last year. Institutional investors are now taking an increasingly dim view of big polluters.

Shell, BP, and Total have all now made significant commitments to cut their carbon emissions. All three plan to become integrated energy companies, rather than oil and gas producers. They’re all increasing their investment in renewable energy.

For example, Total recently invested €2.5bn in Indian renewable group Adani Green Energy. BP has been bidding for new UK offshore wind farm licences. Shell recently bought the UK’s largest electric vehicle charging network, Ubitricity. It also owns a UK electricity supplier.

I think the commitment being shown by each company is real. But I also think it’s far too soon to know how successful they’ll be. After all, they’re competing against more experienced renewable operators and established electricity producers.

Why I might swap Shell for Total

The dividend cuts at BP and Shell weren’t a complete surprise to me. Although I hoped Shell’s payout would be safe, I could see good reasons why both companies needed to cut. On balance, I think it was the right decision.

The problem I have now is that Shell’s high dividend yield was my main reason for holding the stock. Although new buyers today can hope for a reasonable 4% yield from this oil stock, my purchase price was much higher than today’s share price. That means the yield on my Shell shareholding has fallen to under 2.5%, from more than 6% previously.

By contrast, Total has just confirmed its policy of “supporting the dividend through economic cycles.” The payout for 2020 was held almost unchanged at €2.64 per share, compared to €2.68 in 2019.

If Total’s dividend is left unchanged in 2021, then the shares offer a 6.5% yield at current levels. That’s nearly three times the yield I expect from my Shell shares this year.

Which oil stock should I own?

Should I sell Shell and buy Total? I haven’t decided yet. The problem is that I don’t want to overpay for shares in a sector that faces a lot of uncertainty.

Although Total’s dividend yield attracts me, its shares already trade on 14 times 2021 forecast earnings. By contrast, Shell stock trades on just nine times 2021 forecast earnings.

I know Shell quite well and believe the firm’s performance is likely to improve this year. I’m less familiar with Total. But the firm’s higher valuation suggests to me there’s more room for disappointment if difficulties arise.

I haven’t made a final decision yet. But if I was buying an oil stock today for a new portfolio, I’d consider Total.

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Roland Head owns shares of Royal Dutch Shell B. 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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