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The Shell share price vs the FTSE 100: which is the better buy?

Royal Dutch Shell (LSE: RDSB) is one of my favourite dividend stocks in the FTSE 100. And I’m not the only one who likes this business. The stock is a staple of income funds across the country, as well as around the world. 

Last year, FTSE 100 blue-chips paid out a combined £91bn to shareholders. Shell accounted for around £12.3bn of that, making it one of the biggest dividend payers in the entire London market. At the time of writing the stock supports a dividend yield of 6.5%. 

However, while Shell does have attractive dividend credentials, there’s no getting away from the fact that this company is just one business in an industry mired in controversy. Therefore, if you are looking for a steady income stream, it might be better to buy the FTSE 100 instead.

Diversification

Shell is one of the biggest dividend payers in the FTSE 100, but it isn’t the only company that offers a dividend. Only a handful of blue-chips don’t provide a steady income for investors. In total, the FTSE 100 has an average dividend yield of 4.5%. 

This level of income might not match that offered by Shell, but it is from a more diversified base of companies. In my opinion, it’s worth accepting this lower level of income for the additional security provided through diversification. 

On top of the fact that the FTSE 100’s income stream is more diversified, it also seems to offer more in the way of capital growth. Right now, shares in Shell are changing hands for around 2,283p per B share. In September 2014, the shares were dealing for around 2,500p. So, the stock has actually produced a negative capital return for shareholders over the past five years.

The volatile price of oil has held back the group’s growth, and this will continue to be a problem for investors. As one of the world’s largest oil companies, Shell is always going to be beholden to the oil price. 

On the other hand, there are only two big oil companies in the FTSE 100. The rest of the constituents are spread across sectors and industries. Their earnings are not dependent on the price of just one commodity. It should come as no surprise then that the FTSE 100 has produced a better return than the Shell share price over the past five years.

An investor who bought the index in 2014 has seen an annualised total return of 5.7% compared to just 3.7% for an investment in Shell. 

Compounding returns

The 2% gap between the performance of Shell and the FTSE 100 might not seem like much, but over the long term, these few percentage points will add up. For example, an interest rate of 3.7% will turn £1,000 into £2,081 over 20 years. The same £1,000 invested at a rate of 5.7% will grow into £3,077. 

So overall, while Shell has some of the best dividend credentials in the FTSE 100, I think the index itself has better prospects for income and capital growth over the long term. 

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Rupert Hargreaves owns shares in Royal Dutch Shell B. 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.