Management’s decision to cut the company’s dividend sent the Shell (LSE: RDSB) share price plunging when it was announced a few weeks ago.
This was the first time the stock, which was a staple in income investors’ portfolios, had cut its dividend since the end of the Second World War.
But while the Shell share price’s yield is now no longer as attractive as it once was, the stock still stands out as an income investment. As such, it could be a great addition to your income portfolio today.
Buy the Shell share price for income
Shell’s dividend cut caught many investors by surprise. Many income investors might have preferred the company to maintain its dividend, even if it meant selling more assets or borrowing more money.
But the cut makes a lot of sense. It will save Shell an estimated $10bn a year. Management can use this cash to reduce borrowing or invest in operations. It could also open the door to share buybacks and special dividends if profits exceed expectations.
And even after the cut, the firm remains an income champion. The Shell share price currently supports a dividend yield of more than 4%. That’s significantly more than most companies in the current environment. It’s also considerably higher than the best savings account interest rates on the market today.
What excites me is what Shell might do with this extra cash. The company remains one of the world’s largest oil producers, but the planet is slowly moving away from hydrocarbons. Shell needs to invest in the future if it wants to remain relevant, and using the cash to build its renewable energy business could be a sensible decision.
The company could also use the funds to buy struggling peers. This would give it better economies of scale and even more pull over global energy markets. This may be a big positive for the Shell share price.
These initiatives could help improve the company’s earnings growth over the long term. This would be a sensible trade-off — exchanging short-term income for long-term capital growth.
The company can also use the money to reduce debt. This would increase the appeal of the Shell share price from a risk perspective. Paying down debt would help the group cut production costs further, and improve profit margins.
All of the initiatives above should help the business grow over the long term. So, while the recent dividend cut might be disappointing for short-term income investors, it could translate into attractive capital growth over the long run.
As such, now could be a great time to buy the Shell share price for income. A dividend yield of 4% is attractive in the current environment, and this could rise steadily over the coming years as the company re-deploys capital into growth initiatives.
If you are worried about the outlook for oil and gas, owning the Shell share price as part of a well-diversified income portfolio may be the best option.
Rupert Hargreaves 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.