When looking at a stock in which I want to invest for income, I consider three main points. The first and most obvious one is that I want the company to be offering a decent dividend yield at the current price. For me, this is a ‘Goldilocks’ consideration – too high a dividend and it worries me the company is trying to entice investors for some reason, too low and it simply isn’t enough return on my investment. The 5%-6% range is where I feel just right.
Secondly, I want these dividends to be consistent. Though I am a big believer that good management shouldn’t be afraid of cutting dividends if it needs to, for an income-focused investment, this is not what I want. I want nice, steady dividend growth year in and year out, so I know my returns will hold their value.
Finally, I want to invest in a company that will hopefully see its share price climb as I hold the stock, or at the very least be in a solid position to hold its value for the long haul. This, of course, usually means a well-established company in a less volatile industry – a blue-chip firm is usually a safer choice.
The one company that I have held for the past few years, and which meets all these criteria, is the oil giant Royal Dutch Shell (LSE: RDSB).
Does it tick the boxes?
With these criteria in mind then, let us look at Shell’s numbers. It currently has a yield of 5.6%, with a stated policy of growing the dividend “in line with our view of the underlying earnings and cash flow”. This has seen these dividends grow by an annual rate of 5.6% over the past five years. In fact, the company hasn’t cut its dividend since 1945, an impressive statistic if ever I saw one.
That’s a tick for box one and a tick for box two.
Meanwhile, for the past three years, the company has seen both its revenue and profit margins increasing. Naturally, as with all oil companies, much of its outlook depends on the price of crude itself – not the least volatile of markets – but as my fellow Fool Rupert Hargreaves notes, Shell is “well versed in dealing with any issues that arise”.
This investor-focused offering seems set to continue for the foreseeable future as well — the company recently promising up to $125m in cash returns through dividend payments and share buybacks over the next five years.
Holding Shell for the long term seems even more viable when you consider its policies towards diversifying into renewable energy as well as even broader fields. Just last year it explored the possibility of an Uber-style car service (it later stopped its efforts as it became apparent it would not work).
All told, a tick for box three I think.
It may not be the share to pick for skyrocketing short-term capital gains, but for the long term, I back the company. For any income-focused portfolio, I think Shell is one company you can’t ignore.
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Karl 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.