Are these the best dividends money can buy?

Does bigger mean better? Roland Head takes a fresh look at two dividend heavyweights.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

If you’re looking for dividend yields that are both high and reliable, it’s tempting to focus on the FTSE’s biggest dividend stocks.

What’s unusual about the current market is that the biggest dividend stock of them all — Royal Dutch Shell (LSE: RDSB) — is currently offering a dividend yield of 7.4%.

Shell is famous for not having cut its dividend since World War II. Chief executive Ben van Beurden is keen to maintain this record, which attracts a lot of long-term shareholders. But a yield this high is very often a sign of a dividend that’s unaffordable.

Should you invest £1,000 in Bank of Georgia right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Bank of Georgia made the list?

See the 6 stocks

Is a cut likely?

With profits recovering from the oil crash, Shell trades on a 2016 forecast P/E of 23, falling to a P/E of 12.5 for 2017. These figures look reasonable to me.

While the group’s net debt of $75bn is higher than I’d like to see, Shell’s low borrowing costs and long-term outlook should mean that debt-related problems are unlikely. However, this rising tide of debt could put pressure on dividend payments.

Shell’s dividend wasn’t covered by earnings last year, and isn’t expected to be covered this year. If earnings don’t recover next year, I believe the chances of a cut could rise sharply.

Luckily, Shell’s earnings are expected to rise to $2.05 per share in 2017. This would give dividend cover of 1.1 times. Free cash flow should also improve, assuming oil manages to climb above $50. In this scenario, I think a dividend cut is unlikely.

However, there’s a risk that oil will stay low. Shell may reach a point where borrowing money to pay the dividend no longer makes sense. If we use this year’s forecast earnings of $1.11 per share as a baseline, I estimate that in a worst-case scenario, the dividend could be cut by 45% to $1 per share.

Doing this would reduce Shell’s dividend yield to 4%. I don’t think such a big cut is likely, but the reality is that a yield of 4% would still be attractive. Indeed, some investors would argue that it would be more attractive because it would be affordable!

A better alternative?

While I rate Shell as an income buy, the risk of a dividend cut means that for me, it’s not a best buy.

If you’re look for a high dividend yield that can keep pace with inflation, then utility group SSE (LSE: SSE) might be a better alternative. SSE shares offer a 6% yield and have risen by 24% over the last 10 years, compared to just 13% for the FTSE 100.

SSE’s policy is to increase its dividend in line with RPI inflation. This policy is expected to be maintained until at least the 2018/19 financial year.

Last year’s dividend cover of 1.34 times suggests to me that SSE’s payout should remain affordable, especially as the group believes there’s now “increased clarity” on future energy policy.

City analysts are also taking a more positive view of this stock. Forecast earnings for the current year have risen since March, recouping the losses seen last year and putting the shares on a forecast P/E of 13.

I’d be happy to add to my own holding at current levels, and rate the shares as an income buy.

Should you invest £1,000 in Bank of Georgia right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.

And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Bank of Georgia made the list?

See the 6 stocks

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head owns shares of Royal Dutch Shell and SSE. The Motley Fool UK has recommended Royal Dutch Shell B. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

4 REITs Fools own for passive income

REITs often have higher-than-average dividend yields compared to other stocks, making them a solid choice to consider for passive income…

Read more »

artificial intelligence investing algorithms
Investing Articles

Up 272% in just a year, is Palantir stock just getting started?

This writer recognises that Palantir has grown its business very well -- but does the stock price offer him an…

Read more »

Runner standing at the starting point with 2025 year for starting in new year 2025 to achieve business planing and success concept.
Investing Articles

Up 50%? The Aston Martin share price forecast is mind-blowing! 

If analysts are right, the Aston Aston Martin share price could absolutely rocket in the year ahead. Harvey Jones says…

Read more »

Investing Articles

As the S&P 500 drops, here are 2 Stocks and Shares ISA holdings I’m watching

Our writer has different views on how President Trump's tariffs might affect these two US holdings in his Stocks and…

Read more »

Surprised Black girl holding teddy bear toy on Christmas
Investing Articles

£10,000 invested in Tesla stock at Christmas is now worth…

Tesla stock has been one of best-performing investments of the past decade. But things haven't gone to plan for investors…

Read more »

Investing Articles

Up 279% in 5 years, could Meta stock keep soaring?

Meta stock has more than tripled in five years. This writer sees lots to like about the business but also…

Read more »

Pink 3D image of the numbers '2025' growing in size
Investing Articles

25% total return in a year? Is now the perfect time to buy BP shares?

BP shares are on the front line of today's global economic and political uncertainty but analysts think they can still…

Read more »

Affectionate Asian senior mother and daughter using smartphone together at home, smiling joyfully
Investing Articles

With Cash ISA changes coming, could now be the time to consider buying shares?

Changes to the Cash ISA could lead to greater investment in the stock market. This could be a good thing…

Read more »