Are These 6% Yields A Buy? Royal Dutch Shell Plc, Direct Line Insurance Group PLC & BHP Billiton plc

A closer look at the bumper yield on offer from Royal Dutch Shell Plc (LON:RDSB), Direct Line Insurance Group PLC (LON:DLG) and BHP Billiton plc (LON:BLT).

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

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 with a dividend yield of 6% are often worth a closer look. A yield this high can be a sign that a company is out of favour, or is unlikely to deliver much in the way of growth.

The three stocks I’ve highlighted in this article all offer a prospective yield of about 6%. There are some big differences between them, but I reckon all three have potential as serious income buys.

Royal Dutch Shell

Royal Dutch Shell (LSE: RDSB) (NYSE: RDS-B.US) made headlines recently when it announced a £47bn offer for oil and gas producer BG Group.

The move is seen by some as a gamble that oil and gas prices will rise, and investors haven’t reacted very favourably. Shell’s share price has fallen by 11% since the offer was announced on 8 April.

This sell-off has left Shell shares trading below 2,000p for the first time since 2011. I don’t share the markets hostility to the BG deal, which I reckon is a smart way for Shell to acquire BG’s large, high quality oil and gas reserves.

Shell shares now trade on a forecast P/E of 13.5 with a prospective yield of 6.4%. The company’s balance sheet remains extremely strong, with cash of $19bn and net debt of just $24bn.

Shell’s determination to sell non-core assets and control investment should mean that profits remain stable at lower oil and gas prices.

At under 2,000p, I believe Shell shares are a very attractive income buy.

BHP Billiton

Australian mining giant BHP Billiton (LSE: BLT) (NYSE: BBL.US) has taken the opposite approach to Shell, choosing to shrink itself by demerging its non-core assets into a new company, South 32.

Although BHP has promised not to cut its dividend as a result of the demerger, the firm’s shares have fallen since the spin-off became effective. As a result, BHP shares currently offer a prospective yield of 6.0%.

BHP has a long history of progressive dividend growth, but there are risks, here. Weak commodity prices mean that earnings per share are expected to fall to $1.45 this year, giving a forecast P/E of 14.5 and dividend cover of just 1.1.

However, like Shell, BHP has a very strong balance sheet. I believe the miner’s dividend will be maintained, unless conditions in the oil and iron ore markets get unexpectedly worse.

Direct Line

Insurance companies are often great income stocks, as long as you can handle the occasional cut during years when claims are high. Like several of its peers, management at Direct Line Insurance Group (LSE: DLG) have chosen to return surplus cash to shareholders by paying regular special dividends.

Last year, the group paid a total dividend of 27.2p, giving a historic yield of 8.2%. This year, analysts are forecasting a total payout of 36p, giving a massive potential yield of 10.9%!

There’s no guarantee this will continue. The latest consensus forecasts for 2016 suggest that Direct Line’s payout could fall to 19.6p per share next year, giving a yield of 5.9%.

However, that’s still pretty attractive, in my view, and highlights the firm’s ability to generate cash and return it to shareholders.

Direct Line’s valuation is also fairly modest when compared to its earnings. The insurer’s shares currently trade on just 12 times forecast 2015.

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.

Roland Head owns shares of Royal Dutch Shell, BHP Billiton and South32. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

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

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »