There’s an easy-access savings account interest rate war going on among UK financial institutions right now, which is good news for savers. After Goldman Sachs launched its Marcus account in September, which offers an interest rate of 1.5%, other firms have fought back, including Nottingham Building Society, which recently lifted the rate on its easy-access savings account to 1.55%.
However, compared to the yields on offer from many dividend stocks, cash savings interest rates still look abysmally low right now. If you’re willing to take on the risk of investing in the stock market with a view to building a portfolio for the long term, you can pick up yields right now that absolutely smash the rates on offer from savings accounts.
Today, I’m looking at a FTSE 100 dividend stock that is one of the most popular stocks in the UK and currently yields nearly 6%.
Big dividend cheques
Oil giant Royal Dutch Shell (LSE: RDSB) is a popular dividend stock among private investors and institutional fund managers alike. And that’s no surprise really, as Shell is the largest company listed in the UK, it’s a very easy company for investors to understand, and the yield on the stock at the moment is huge at 5.8%. That’s nearly double the FTSE 100’s average yield of around 3.1% and nearly four times the yield available from the best easy-access savings accounts. Furthermore, Shell has an outstanding long-term dividend track record and hasn’t cut its dividend since World War II, meaning that it’s a highly reliable income machine. Investors all over the world, both large and small, depend on Shell for its dividend, and the group doesn’t disappoint, placing a strong focus on rewarding investors with regular cash payouts.
With the oil price having risen significantly over the last two years, oil companies such as Shell are in a sweet spot right now. Cash flow and profits are up and I think that’s great news for dividend investors, as it means there’s less risk of a dividend cut and more chance of dividend increases in the future.
Last week, Shell reported that third-quarter earnings attributable to shareholders jumped 51% on the same period last year and that cash flow from operations for the period surged 59%. While the group didn’t lift its dividend on this occasion, it did strengthen its financial position by paying down debt and buying back its own shares which I see as a good move in the long run. CEO Ben van Beurden commented: “Good operational delivery across all Shell businesses produced one of our strongest-ever quarters.”
Of course, as a company with profits related to the oil price, Shell’s share price could fall if the oil price experiences a period of weakness. So putting your money into Shell is a higher risk proposition than keeping it stashed in an easy-access account. Yet when you consider that the yield here is almost four times the yield on offer from cash savings accounts and significantly above inflation, I think that’s a risk worth taking. With the shares trading on a forward P/E ratio of 11.9, they don’t look expensive to me right now.
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Edward Sheldon owns shares in Royal Dutch Shell. 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.