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Is Lloyds Banking Group plc or Royal Dutch Shell plc the better dividend stock?

At first glance, both Lloyds Banking Group (LSE: LLOY) and Royal Dutch Shell (LSE: RDSB) would appear perfect picks for income seekers.

City consensus suggests that both firms are set to smash the future payouts of much of the FTSE 100. Lloyds, for example, is anticipated to hike last year’s reward of 2.25p per share to 3.4p in 2016, creating a dividend yield of 6.2%.

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Such a figure lays waste to the British big-cap average of 3.5%.

And Shell’s forecasts also set fire to the FTSE 100’s mean figure — a predicted 188 US cents per share, in line with last year’s payout, yields a spectacular 7.1%.

Bank in bother…

But scratch a little deeper and the dividend picture at these Footsie giants becomes a little more cloudy.

There’s no doubt that the rampant cost-cutting and asset shedding of recent years has built a very, very healthy balance sheet at Lloyds. Indeed, the bank’s latest financials revealed a CET1 capital ratio of 13.5% as of June (before dividends).

The positive impact of Lloyds’ Simplification restructuring plan, allied with its focus on the stable-if-unspectacular British retail sector, led me to sing the praises of its dividend outlook in previous times.

But the result of June’s referendum has led me to revise my positive stance, with economic data in recent weeks increasingly pointing to a painful recession, possibly by the end of 2016. This could play havoc with Lloyds’ earnings outlook, naturally, and with it the firm’s ability to raise dividends.

Meanwhile, the spectre of the PPI mis-selling scandal is a problem that refuses to go away. The bank has stashed away around £16bn already to cover costs, and although no further provisions were made during the first half, the FCA’s decision to extend a possible claims deadline by a year — to 2019 — could extend the pain for Lloyds’ balance sheet.

… Pumper in peril

The payout picture over at Shell is also fraught with considerable peril, in my opinion.

First of all, earnings are predicted to come in at just 105 US cents per share in 2016, falling woefully short of the projected dividend. And the bottom line is unlikely to pick up any time soon thanks to the supply glut washing over the oil market.

Meanwhile, the capex-heavy nature of Shell’s operations are heaping more and more pressure on the firm’s balance sheet. Net debt rose to a shocking $75bn as of June, up from just under $70bn three months earlier.

The company is trying to ride out the current down-cycle by hiving off assets and taking the axe to its exploration budgets. But there’s only so far these measures can go before they become earnings-destructive. That’s particularly so if oil prices resume their downtrend — West Texas Intermediate values fell through back the $40 per barrel marker just last week.

Given these factors, I reckon both Lloyds and Shell are dicey stock selections for those seeking cast-iron dividend growth in the near term and beyond.

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Royston Wild 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.