2017 could be another volatile year. Brexit and the full effects of the Trump presidency lie ahead. The pound could bounce back against the dollar — or fall further. Interest rates may even rise. All of these could hit share prices hard.
To help protect my savings from this kind of short-term volatility, I’m aiming to build up a robust, high-yield income portfolio. In this article I’ll look at two dividend heavyweights which I believe could perform strongly this year.
A safe 6.6% yield?
Shares of Royal Dutch Shell (LSE: RDSB) have risen by 81% over the last 12 months. Interestingly, this takes the stock back to the level where it traded in 2012 and 2013. That’s a period when oil prices were much higher, but when profits were falling as costs ran out of control.
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The situation is quite different today. Shell’s 2016 underlying operating costs of $40bn were nearly 20% lower than Shell and BG’s combined costs in 2014. The company is now focused on maximising profits, rather than expanding production at any cost. Like its peers, Shell is now much more careful about committing to major new projects.
Profits are expected to rise fast this year. Consensus forecast suggest that Shell’s underlying earnings will rise by 83% to $1.98 per share in 2017. If the price of oil continues to rise, these profit forecasts could be upgraded.
Of course, the main attraction for investors is Shell’s dividend, which hasn’t been cut since World War Two. The payout is expected to be covered by earnings this year, for the first time since 2014. I believe this makes a dividend cut unlikely, assuming Shell can make progress with its plan to sell $30bn of assets and reduce debt levels.
The oil and gas giant’s shares currently trade on a 2016 forecast P/E of 26, falling to a P/E of 14 for 2017. The forecast dividend yield of 6.6% represents a solid opportunity for long-term income investors, in my view. I continue to rate Shell as a long-term buy.
Postal dividends
While Shell has been rocketing higher, shares of Royal Mail (LSE: RMG) have been falling. The postal group has lost almost 20% of its value over the last six months. This week’s nine-month trading update showed flat revenue for the nine months to 25 December, confirming fears that Royal Mail is struggling to replace falling letter volumes.
Investors are concerned that intense competition in the parcels market, along with the ever-present risk of strike action, will put Royal Mail’s profits under pressure. I believe these are valid concerns.
However, my view is that Royal Mail’s extensive network of Post Office branches and its unique last-mile delivery network should enable the group to remain profitable. I’d argue that if Royal Mail fails to manage the shift from letters to parcels, it will be down to poor management, rather than weak fundamentals.
At about 420p, Royal Mail shares now trade on a forecast P/E of 10, with a prospective yield of 5.4%. I believe this should provide an attractive long-term entry point. I’m planning to add to my own holding over the coming weeks.
