This Week’s Top Blue-Chip Income Buy: Royal Dutch Shell Plc

I’m always on the lookout for big FTSE 100 companies when they’re being offered in the market at an attractive valuation for dividend investors. A little higher yield at the time you buy can make a big difference to the growth of your income stream over the long term. Right now, I reckon Royal Dutch Shell (LSE: RDSB) (NYSE: RDS-B.US) is looking a great buy for income.


Shell is the biggest company on the FTSE 100, weighing in with a market value of £130bn. Last year the board distributed a staggering $11bn of dividends. That may be mind-blowing in nominal terms, but $467bn of revenue and $27bn of profit put it into perspective.

Big oil companies are geared to the prevailing state of the global economy and the economic outlook. As such, revenues and profits can ebb and flow pretty dramatically. Nevertheless, Shell has been adept at maintaining good dividend cover and growth across the economic cycle. I emphasise that because there have been years of dividend stagnation and poor cover, but more than offset by the years of impressive growth.

A great opportunity right now

Shell’s shares reached a high for the year to date — 2,365p — as long ago as January. At the time of writing, the shares are trading at 2,130p, 10% down from the peak and only a little above their recent low for the year.

There’s no doubt about it, Shell is unloved by the market. The company is trading on just 8.7 times this year’s forecast earnings and 8.2 times next year’s. That puts the shares deep in ‘value’ territory.

However, dividend income is the focus of this article, so let’s move swiftly on to that. Back in January, Shell’s forecast 12-month dividend yield was as low 4.8%. Today, the potential starting income has gushed up to 5.5%.

The two quarterly dividends Shell has paid so far this year were 5% up on the 2012 payouts, which bodes well for the year ahead — although do bear in mind that the company declares its dividends in dollars, so there can be some divergence for sterling investors due to exchange rates.

Nevertheless, Shell’s history of increasing its dividends across the economic cycle applies equally to sterling investors, and I see no reason why that can’t continue. Hence, with a juicy potential starting yield of 5.5%, I rate Shell a great buy for long-term income investors right now.

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> G A Chester does not own any shares mentioned in this article.