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Here’s why I’d buy Shell for its dividend yield

When it comes to dividend stocks, bigger is generally better, and they don’t come much bigger than Royal Dutch Shell (LSE: RDSB). The largest stock in the FTSE 100 has been very good to its shareholders in recent years and I don’t expect it to slow down any time soon.

Cash is king

For an income giant like Shell, cash flow is the most important metric. Having ample cash flows allows Shell to do a number of things. Firstly, it means the company can cover its capital expenditures, which includes maintaining existing assets like oil rigs and pipelines, as well as investing in new facilities and projects. Secondly, it allows it to reduce the debt load, freeing up cash in future quarters and reducing interest rate risk. And thirdly, it allows Shell to return capital to shareholders via dividends and share repurchases, both of which have been used extensively by management. Let’s take a look at how Shell has used its capital to do all three of these things.

Last year, the company generated an annual total cash flow from operating activities of £41.8bn. This was more than enough to fund capital expenditures of £18bn, as well as over £12bn in dividends and £3bn in repurchases. However, these generous returns to shareholders pale in comparison to the recently-announced plan to distribute £98bn from 2021 to 2025. As reported by my colleague Rupert Hargreaves, Shell is forecasting an annual free cash flow of over £27bn until 2025.

Robust cash flows are exactly what income investors should be looking for, as they are the fuel that sustains dividend payouts. Shares of Shell currently have a dividend yield of over 6%, on par with rival BP (LSE: BP) (also just over 6%) and higher than US-listed Exxon Mobil (4.77%) and Chevron (4.05%). Shell also has a long history of maintaining or increasing its dividend, having not cut it in over 70 years.

Growing well

In late May, Shell announced that its new Appomattox offshore oil rig in the Gulf of Mexico had started production, significantly ahead of schedule and under budget. The rig, which was only expected to come online no earlier than the third quarter of this year, will provide a sizeable boost to revenues that investors may not have been expecting.

While oil continues to account for a very large part of Shell’s revenue, the company is not blind to the changing trends in the energy sector. In recent years, it has increased its production of natural gas, including liquefied natural gas, which is easier to store and transport. The Integrated Gas and New Energies ops account for around 44% of Shell’s total earnings, and as part of this, Shell plans to spend up to £1.6bn on renewable initiatives annually, in an attempt to reposition itself and to anticipate consumer trends.

Overall, Shell’s high dividend yield and growing cash flow make it an attractive income play, I believe. To me, the company seems well set up both for the short term and for much further into the future, even if the share price fails to appreciate significantly.

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Stepan Lavrouk has no positions 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.