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Two 7% FTSE 100 dividend shares I want to buy in February

I’ll declare an interest. I already own shares in both of the companies I’m going to write about today. But I want to buy more in February. Let me explain why.

A genuine bargain?

FTSE 100 insurance group Aviva (LSE: AV) is sometimes seen as a laggard, without the growth and specialist focus of some rivals. But while it’s true that Aviva has been a slow grower in recent years, I don’t think investors need to worry about this too much.

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In my view, any risks faced by shareholders are already in the price. As I write, the Aviva share price stands close to 400p. That prices the stock on just seven times forecast earnings, with a dividend yield of 7.7%.

This payout should be covered 1.9 times by 2019 earnings, so a cut seems very unlikely. It’s also worth noting that the group’s surplus cash generation has comfortably covered the dividend in recent years, making a cut seem very unlikely.

Win-win scenario

Two things could happen next. Aviva boss Maurice Tulloch could succeed where his predecessors have failed by returning the group to growth. He’s already launched plans to sell some non-core businesses and split the UK business into separate life and general insurance divisions.

If Tulloch fails, then I think that Aviva could be split up or perhaps even sold. If so, then I’d expect this process to release value for existing shareholders.

Aviva is one of the core holdings in my personal income portfolio. The capital gains on my position have been limited but the income I’ve received – over a number of years – has been excellent. I think the shares are too cheap and rate them as a strong buy for income.

Go against the crowd

Investors aren’t exactly queuing up to buy shares in Royal Dutch Shell (LSE: RDSB) at the moment. The Shell share price has already fallen by 10% this year and is down by over 20% from last summer’s high of £26.

There are several reasons for this.

A growing number of investors have environmental commitments that are hard to square with fossil fuel investment.

The market is also concerned about the risk of stranded assets – oil and gas reserves that won’t be extracted because of changing demand (or legislation). That risk may still be some way in the future. But lower oil prices are here today and have hurt Shell’s profits over the last year.

In 2018, Shell sold its oil for an average of $63.85 per barrel. In 2019, this figure fell by 10% to $57.76 per barrel. Gas prices dropped by 11% as well. Weaker prices caused the group’s underlying net profit to fall by 23% to $16.5bn in 2019.

My view

Shell’s profit slump has left the stock trading close to 2,000p, at its lowest level since late 2016. The shares are now trading on just 10 times forecast earnings, with a dividend yield of almost 7%.

I reckon this is too cheap. Shell hasn’t cut its dividend since the Second World War and shows no sign of doing so now. Cash generation remains healthy and the company is taking steps to prepare for a lower carbon future. At current levels, I think the stock’s 7% yield could make it a great buy for income investors.

A top income share with a juicy 5% forecast dividend yield

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Roland Head owns shares of Aviva and 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.