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Is the Shell dividend a sign of things to come?

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Some stocks you buy for growth, some you buy for income. For me, the Royal Dutch Shell (LSE: RDSB) dividend was always a draw. It was with much disappointment I saw it slash its payout earlier this year. Disappointment, but understanding. In times of trouble, one must be cautious.

News yesterday then, that the dividend would be increased in the next payout had me excited. What’s more, Shell said, “We are starting a new era of dividend growth”. Even better – I hope.

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The Shell dividend in context

Now yesterday’s news is not exactly the greatest increase I have ever seen. Shell increased its next dividend payment by about 4% to 16.65 cents. This far from makes up for the 66% slash it undertook in April. But still, it is a move in the right direction.

Shell has a good history of dividend payouts. Until this year, it had one of the longest and most consistent payout schemes in the FTSE 100. It was an income stock through-and-through.

We do need to ask ourselves now though, is this latest announcement the right thing to do? I have said it before, but it is often the right decision for a firm to cut or halt dividends in times of trouble. Reinvesting cash into the business helps secure its future more than paying investors.

With low oil prices continuing, Covid-19 still dominating and a recession looking ever more likely, we have to question the company’s decision this time.

Shell said “Our sector-leading cash flows will enable us to grow our businesses of the future while increasing shareholder distributions, making us a compelling investment case”. The Shell dividend, unsurprisingly, is aimed at attracting investors.

The future of the share price

The Shell dividend increase will of course, help bolster its stock to some extent. It is still far from previous levels, so it is hard to imagine a new wave of income investors flocking to the stock that were not already interested.

I also do believe that the cash outflow will not really harm Shell’s prospects. Oil prices are subdued at the moment but they will go back up at some point. The major factor here of course, will be Covid-19 and the airlines.

Though a vaccine may be around the corner, the future of Covid-19 still seems very uncertain. In the UK and other European countries, second lockdowns are already taking place. The airline and travel industry is hanging on by a thread.

The worst-case scenario I see for the large oil majors is a global recession. Let’s face it; businesses across the board are suffering. People are losing jobs and at this stage, we don’t know when it will end. Any major recession will hurt many oil-demanding firms long after Covid-19 is subdued.

That said, I am still fairly positive on Shell. I am happy to hold on to the stock I already own, though perhaps not willing to increase my position just yet. Its efforts towards a green energy platform I think are good for the long term.

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Karl has 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.

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