Is a Trump presidency my chance to earn a second income by investing in FTSE 100 oil stocks?

Is a second term in office for Donald Trump combined with big dividend yields from Shell and BP a golden opportunity to start earning passive income?

| More on:

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Shares of BP (LSE:BP) and Shell (LSE:SHEL) come with some attractive dividend yields. That naturally means they catch the attention of investors looking for a second income.

Both stocks are on the up as it looks almost certain that Donald Trump will (again) be the next President of the US. But I think investors should be very careful here. 

Oil outlook

In general, Trump favours hydrocarbon energy over renewables. This immediately raises questions about the Inflation Reduction Act, which was subsidising the energy transition.

This could well have the effect of boosting demand for oil – especially in the US. And both BP (29%) and Shell (22%) generate significant revenues across the Atlantic. 

Despite this, the benefits to both FTSE 100 companies could be limited. Any rise in demand seems likely to be met by an increase in supply, which is why the price of Brent crude is falling. 

The companies that stand to benefit the most – in my view – are US producers. And I think this could be a real problem for both BP and Shell. 

Taxes

Reducing the rate of corporate tax to 15% has been a big part of Trump’s campaign. This would amount to significant savings for the likes of Exxon Mobil, Chevron, and ConocoPhillips.

In Britain, things are going the other way – last week’s Budget featured an increase in windfall taxes on UK producers. This makes me very wary about BP and Shell.

Dealing with higher taxes when competitors are getting a break puts the FTSE 100 firms at a cost disadvantage. And that leaves them more exposed to the impact of lower oil prices.

A lot goes into oil prices beyond the US. But I expect lower taxes to lead to increased output and I think this is likely to be a challenge for UK producers over the next few years.

Passive income

Despite this, shares in BP and Shell could be attractive from an investment perspective. In general, they trade at a significant discount to their US counterparts. 

Shell, for example, currently trades at a price-to-book (P/B) multiple of 1.24, compared to 2.52 for ConocoPhillips. And the gap is the widest it has been at any time in the last decade.

Shell vs. ConocoPhillips price-to-book ratio 2014-24


Created at TradingView

Equally, the dividend yield on BP shares is almost 6%, while ExxonMobil stock comes with a much lower 3.3% yield. That reflects a substantial difference in the market’s expectations. 

This is something to consider carefully. Although the FTSE 100 oil majors are facing challenges their US counterparts are not, investors get a lot more for their money from the UK stocks.

Should I buy FTSE 100 oil stocks?

On the face of it, Trump’s disposition to support US oil production isn’t a reason to start buying shares in BP and Shell. But the situation is a lot more complicated than this.

A focus on hydrocarbons over renewables might boost the long-term demand for oil. And that is something the UK producers could stand to benefit from.

The big question is whether or not the valuation discount the FTSE 100 companies trade at is worth the additional challenges. I’m taking a wait-and-see approach.

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.

Stephen Wright 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.

More on Investing Articles

Man smiling and working on laptop
Investing Articles

2 high-yield dividend shares to consider for a BIG second income in 2025

Looking for ways to make a market-beating second income next year? You might want to take a look at these…

Read more »

Smiling diverse couple holding Christmas presents while walking through a winter forest
Investing Articles

2 FTSE 100 and FTSE 250 value stocks to consider in December!

Searching for the best FTSE 100 and FTSE 250 bargain shares? Here, Royston Wild picks out two of his favourites…

Read more »

Investing Articles

3 mega-cheap small-cap stocks to consider in December!

These small-cap stocks are on sale right now. Royston Wild thinks they merit serious attention, even from investors chasing passive…

Read more »

White female supervisor working at an oil rig
Growth Shares

Based on these oil price forecasts, the BP share price could have a tough 2025

Jon Smith explains why he thinks a stagnant oil price could be a problem for the BP share price over…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing For Beginners

This AI penny stock could be set to explode higher in 2025

Jon Smith spots a penny stock that's secured a couple of large contracts recently and that he thinks could be…

Read more »

Growth Shares

Up 100%+ in a year, here’s an unsung growth stock for investors to consider

Jon Smith talks through a growth stock that's been on a one-way trip to the stratosphere in recent months, thanks…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Here’s why the Lloyds share price faltered in November

The threat of unspecified car loan liabilities kept the Lloyds share price in check during November. But is the market…

Read more »

Investing Articles

Here’s 1 cheap UK share I wouldn’t touch with a bargepole!

Despite attracting the attention of two major investors and trading at a discount to its book value, our writer doesn’t…

Read more »