Shell (LSE: SHEL) just posted a big jump in profits for the first quarter, with adjusted earnings of $9.6bn. It sounds to me like it might just be a good bet for a nice bit of passive income.
There’s so much cash floating around that Shell will hand back $4bn over the next quarter in the form of a share buyback. And that should take total returns in the first half to around $12bn.
Although Shell shares have climbed since 2020, they’re still only just above pre-Covid levels. Today they’re on a forecast price-to-earnings (P/E) ratio of only seven, with a 4% dividend yield.
Passive income
So what would I need to invest to earn £1,000 per year in passive income? Well, on that 4% per year, I’d need to plonk down £25,000.
At today’s price, that amount of cash would get me around 1,060 shares. So let’s say 1,100 for a bit of safety.
I don’t have that much lying around right now. But then, I don’t want any passive income just now. No, I hope to work for a good few years yet before it’s time for me to retire.
And that should help me build up my ISA a bit more, maybe with some Shell shares.
Diversify for safety
In real life, I wouldn’t put a full £25,000 into one stock like Shell. I’d want a range of stocks from FTSE 100 sectors to lower my risk.
But the same kind of sums I’m doing here would apply to other stocks too, so this is really just a one-stock example of the way I think about it.
Shell does have its own risks, for sure. The big one is all about the end of fossils fuels. To be honest though, I think the fears are overdone.
Yes, oil and gas use will surely drop. But I can see it stable at a lower level for a long time to come. And much of the risk, I think, is already built in to today’s low Shell share price.
Still, anyone buying the shares today needs to understand the risks and be happy with them.
Build a pot
Anyway, how long might it take me to build up my pot of 1,100 Shell shares?
Well, I reckon that if I start with £1,000 per year right now and use that money to buy shares, I could get there in 17 or 18 years.
After that, I could sit back and take the £1,000 as income each year instead. Oh, and any share price rise would be a nice bonus.
Then, all I have to do is repeat it by putting another £1,000 per year into another FTSE 100 stock with a good dividend yield. Do that a few times, with as much as I can afford, and I could end up with a very nice passive income.
Shell outlook
The outlook for Shell is very much up in the air. And many will want to steer clear of oil and gas. But I think the financials, at least, look good. And the same kind of approach should work with many other stocks.
