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I don’t care about Shell’s 5.8% dividend yields! I’d rather buy other UK shares in my ISA

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Dividend cuts and stoppages have been coming thick and fast in 2020. And there are likely to be more coming down the tube before the year is out as UK shares’ profits suffer. For this reason I won’t be investing my hard-earned cash in Royal Dutch Shell (LSE: RDSB) any time soon.

Investors in the FTSE 100 fossil fuel giant haven’t had much to cheer about in 2020. The oilie’s share price has dropped 60% so far in 2020. But they’ve had a little good news to cheer on Thursday.

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Today the firm announced that adjusted earnings had risen in the third quarter, to £955m from £638 in Q2. It advised that it was taking steps to reduce net debt to £65bn from £73.5bn at the end of September. Once this goal is hit, Shell intends to distribute between 20% and 30% of cash flow from operations to its shareholders via a combination of share buybacks and dividends.

Image of person checking their shares portfolio on mobile phone and computer

In the meantime, Shell said that it would raise the third-quarter dividend 4% to 16.65 US cents per share. It comes as reassuring news after the firm cut dividends for the first time since the mid-1940s during the spring.

Risky business

But I worry that the decision to raise the dividend again could be a false dawn for embattled investors in this most battered of UK shares. There’s been a slew of worrying news about global production levels in recent days and weeks. And the signals surrounding much-needed output cuts from the OPEC+ group are fanning fears over a supply glut too.

There is no sign that OPEC+ is willing to cut deeper,” commodities analyst Bjarne Schieldrop of SEB commented today. “At most, it seems they are willing to extend current cuts to the first quarter of 2021 rather than to increase [them] by 1.9m barrels a day.”

This is why Brent prices have descended again in recent days. Indeed, the benchmark’s just tipped to its cheapest since May around £37.30 a barrel. Things could get even bloodier too, should Covid-19 infection rates continue to climb and fresh lockdown measures transpire across the world in the weeks and months ahead. Shell could well find itself under pressure to take drastic dividend action yet again.

As Schiekdrop added: “With no improving trend in implied demand — now down 2.3m barrels a day year-on-year… it could be a tough time for oil in the months ahead until a Covid-19 vaccine liberates markets.”

Better UK shares

This is why I’m happy to look past Shell’s 5.8% dividend yield for 2020. City analysts are expecting a significant reduction in the annual dividend this year. But I fear that the cuts could be gorier than even the most pessimistic brokers reckon.

Investors like me also need to consider the prospect of much thinner dividends being shelled out in 2021 too. Why take a gamble on Shell when there are so many other great UK shares available for income chasers today? I won’t be buying this FTSE 100 oilie for my ISA.

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Royston Wild has no position 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.

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