If Royal Dutch Shell plc’s 7.52% yield is safe, why wouldn’t you buy it?

Oil major Royal Dutch Shell (LSE: RDSB) offers the third-highest yield on the entire FTSE 100, paying a high-octane 7.52%. That’s more than 15 times base rate, which is astonishing by any historical measure. It’s even more astonishing when you consider that the world has embarked on a global ‘search for yield’ as relief from record low interest rates. Surely the answer is staring them in the face?

Sure of Shell

The case looks even more compelling given that Royal Dutch Shell hasn’t cut its dividend since the Second World War. If you bought today and held the stock for just over 13 years you would double your money,  even if the share price stayed flat in that time. These are strange times and investors are in danger of taking juicy yields like this for granted.

So why aren’t people rushing to buy shares in Shell? Largely because they don’t trust the security of Shell’s dividend. Markets aren’t mugs, and there’s good reason to feel insecure as the plunging crude price threatens every oil industry certainty. With a barrel of Brent trading as low as $27 in January, there was good reason to think Shell’s payout was no longer affordable. Last year, the dividend cost the company a whopping $9.37bn, money it could put to good use elsewhere.

Put a Soc in it!

So what if Shell did cut its dividend by, say, half? That would still leave it yielding 3.76%, which isn’t half bad. Also, management would be keen to make swift amends, so you could expect above-average progression going forward. The big downside, of course, is that it would scare the market and shatter the share price, which could easily fall 10% or 20%, maybe more. Understandably, that scares people.

Now get this. Shell’s dividend may be a lot safer than the market currently thinks. That’s the view of analysts at SocGen, who’ve just said that investors need not be overly-concerned about the risks to its payout, because the oil giant has other ways of saving cash. If necessary Shell, could opt to maintain its scrip dividend beyond next year while delaying its $25bn four-year share buyback programme. If necessary.

Turbo-charged income

These two measures would save the company $10bn a year in cash outflow, which SocGen says would be equivalent to an extra $20 on a barrel of oil, lifting it to around $70. Its analysts reckon this is sufficient for Shell to manage its balance sheet, despite questioning Shell’s three-year timeline for completing its targeted $30bn of asset disposals.

SocGen has a target price of 1,900p for a stock currently trading at 1,720p, which would suggest capital growth of around 10%, but this doesn’t particularly interest me. It’s the yield that counts with this stock today and any capital growth should be seen as a bonus.

Trading at 8.02 times earnings, the valuation is temptingly low. The share price is up 37% since its January’s lows, driven by the oil commodity stock recovery. You may have missed out on that initial rebound but you may not want to miss this great income opportunity as well.

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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has recommended Royal Dutch Shell B. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.