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Forget the cash ISA. I’d rather have Shell’s juicy 6% dividend yield

The oil price is falling again, and taking the Royal Dutch Shell (LSE: RDSB) share price with it. Shell’s stock has fallen 7% in the past three months, which might scare some investors away, but others will see this as a buying opportunity.

Crude slump

The oil price crash as been even more dramatic than you think. On 3 October, a barrel of Brent crude briefly peaked at $86.29. At time of writing, it trades at $59.84. That is a drop of just over 30% in less than two months.

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The sell-off has been driven by a number of factors, as sell-offs normally are, although ultimately it comes down to supply and demand. Investors fear we are heading for an oil glut with the US, Saudi Arabia and Russia each pumping up around 11m barrels per day (bpd), while the global economy slows.

Troubled waters

OPEC members have been taken by surprise and are talking about cutting production, but there’s been no action so far. Saudi Arabia seems unlikely to go it alone, especially with Donald Trump pushing it to carry on pumping. And with non-OPEC output climbing by 2.3m bpd this year, the impact may be weaker than it was.

Crude has now suffered a seven-week streak of consecutive losses, frustrating oil executives who were only just beginning to enjoy higher prices again. It could fall further as US oil and gas reserves hit record highs, but such are the variables, nobody can say for sure.

Split opinion

What you can say is that the largest stock on the FTSE 100, with a market-cap of nearly £200bn, is cheaper than it was. It is also trading at a forecast valuation of 11.4 times earnings, which suggests it’s yours for a discounted price.

My fellow Fools are divided. Alan Oscroft reckons this is a great opportunity to buy a cash-generative income stock for the long term. Shell has sustained its dividends since the war and kept paying out during the last slump, so there’s plenty of resilience there.

Oil shock

Other Foolish contributors are less convinced. Royston Wild has been warning about the threat of chronic oversupply in the market for several years and fears the stock could sink further in 2019. Even if OPEC does cut production, any share price fillip will be short-lived, as US shale drillers take up the slack.

The numbers look attractive, though. Shell yields a forecast 5.9%, with cover of 1.4, which thrashes the 1.5% on the average cash ISA (although with more risk of course). By the end of 2019, this is expected to have cranked up to 6.2%, with cover a robust 1.75, my calculations suggest. City analysts reckon that earnings per share will rise by 67% this year, and another 23% in 2019.

There is a longer term threat, as the dash to renewables and electric cars forces the oilies to revise their business models. The world is changing, but I would back Shell to change with it. It still looks a strong long-term buy-and-hold for me at today’s price.

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harveyj has no position in any of the shares mentioned. 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.

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