Royal Dutch Shell (LSE: RDSB) is one of my favourite income and growth stocks for several reasons.
First of all, the company has been paying a dividend to investors since the end of the Second World War, a record few other firms can claim and one it’s unlikely to break any time soon.
Second, this dividend history is backed up by the firm’s leading position in the global energy markets. As well as producing and refining hydrocarbon products, it is also one of the world’s largest energy traders. So, not only does the company produce oil and gas, but it also makes sure it gets to the right place at the right time. To make sure these products get to customers safely, Shell has built a global oil infrastructure network that would be virtually impossible to replicate from a standing start today.
What’s more, the company is also investing for the future. Management has earmarked $2bn a year for investment into sustainable energy technologies such as wind and solar farms, and electric vehicles.
For example, last year the company snapped up European electric vehicle charging pioneer NewMotion and is rolling out charging points across its petrol forecourts as well as working with carmakers to offer high-speed charging points for electric vehicles in 10 European countries.
While Shell’s annual $2bn spend on sustainable energy is only around 10% of the firm’s overall capex budget, that’s still a lot of cash and the effort signals the group is heading in the right direction. After all, only 2% of the total new car market in 2017 was for electric vehicles. Also, as this is a relatively new direction for the group it seems sensible to invest slowly in green tech at first, so Shell can build experience in the market.
Building for the future
These efforts to prepare the company for the future, along with Shell’s existing presence in the global oil and gas market and management’s efforts over the past few years to slash costs (as well as plans to buy back $25bn of shares between 2017 and 2020) lead me to conclude that the outlook for this blue-chip champion is bright.
Unfortunately, as an oil major, Shell’s earnings outlook is tied to the volatile price of oil. So it is difficult to predict how earnings will evolve over the next decade (and for this reason, my Foolish colleague Royston Wild believes investors should sell the shares). However, even if shares in the company go nowhere over the next few years, shareholders should still see a fantastic return as management prioritises the group’s dividend.
Compound income
Right now the stock supports a dividend yield of 5.9%, enough to turn £10,000 into £32,000 over 20 years if dividends are reinvested.
If you invest your entire ISA allowance in Shell and continue to do so for the next 23 years, assuming all dividends are reinvested, your savings pot will have grown to £1.05m — that’s excluding any share price growth. And today, you can buy this income stream for just 13 times forward earnings, which does not seem too demanding, in my view.
So overall, I believe that Shell’s market-beating dividend yield can help you build a £1m ISA account.
