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

This Fool thinks shareholders of Royal Dutch Shell plc class B (LON: RDSB) have a lot to look forward to.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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.

More on Investing Articles

Passive income text with pin graph chart on business table
Investing Articles

Yields of up to 7%! I’d consider boosting my income with these FTSE dividend stocks

The London market has some decent-looking dividend stocks right now, and I’m tempted by these two for growing income streams.

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »