A 5%-yielding FTSE 100 dividend stock I’d buy at a rock-bottom price

Many FTSE 100 stocks are undervalued at present. This one also has a sustainable 5% dividend yield, says Rachael FitzGerald-Finch.

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.

Many FTSE 100 companies are currently undervalued. The drop in the Footsie index, due to the coronavirus shutdown, means now is an excellent time to invest in the stock market. In addition, low bond yields could make returns from share ownership extremely attractive by comparison. This is especially true of dividend stocks where total returns can be even higher. 

However, sometimes high dividend stocks are risky investments. There are a few firms on the Footsie right now with large dividend yields. Some of these firms face an uncertain future, unless the economic winds change direction. These stocks do not make a good investment case, despite the high yields. But, what if there is an exception?

I think there is. And it’s Royal Dutch Shell (LSE: RDSB).  

A top FTSE 100 dividend stock

At the current share price of 952p, Shell’s dividend for this financial year works out at just over 10%. However, going forward into the next financial year, if the 12p dividend per share remains the same, Shell investors can expect a dividend yield of around 5%. In this economic climate, that is pretty juicy.

However, a good yield is irrelevant if a company can’t pay it, and Shell’s 95% payout ratio is a concern. This means the oil major currently pays out most of its profits in dividends. But, the dividend per share has already been cut, share buybacks suspended, and cost-cutting measures imposed. Shell aims to deliver $2.5bn of savings by the end of 2022.

These actions mean Shell should be able to cover its future dividend commitments, even if earnings drop further. The oil major has a history of enticing capital by appealing to shareholders, and I expect this to continue. 

Shell’s undervalued share price 

Shell is currently selling on the Footsie on a price-to-earnings valuation of approximately 6. By comparison, peer BP‘s P/E is around 14. Apparently, the FTSE expects more from BP in the future. The lower ratio for Shell may reflect its recent earnings decline due to low oil prices, in addition to the share price drop. However, I think there are reasons for optimism.

Shell’s future focus is electric power generation via solar and other technologies, such as charging stations for electric vehicles. It sees a future for itself in renewables and is investing accordingly. Natural gas is also a priority and its integrated gas business is now the biggest sector in its portfolio, replacing downstream. It is also the largest supermajor liquid natural gas (LNG) producer. So, whatever happens with the oil price, Shell is well diversified for the future and is restructuring accordingly.

In addition, Shell is trading on a price-to-net-tangible-asset value of 0.28, meaning its stock is selling for less than the value of its physical assets. Notably, its assets have already been written down this year due to lower oil prices and smaller profit margins. Many pundits expect the oil price to improve. If this happens, Shell’s asset base will rise in value once again.  For me, the current share price represents significant undervaluation.  

I think Royal Dutch Shell is probably one of the top FTSE 100 dividend-paying stocks to buy in 2020. It has a juicy yield and there’s a future for its products. And, even better, it’s currently going cheap. But, for how long?  

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.

Rachael FitzGerald-Finch owns shares of Royal Dutch Shell B. 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.

More on Investing Articles

Investing Articles

Up 26%, can the BT share price really push higher still?

The BT share price has surged on several catalysts in 2024, but there’s evidence to suggest that the stock could…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

What are the best dividend shares to buy right now?

As shares in B&M European Value Retail have fallen, the dividend yield has reached a 10-year high. Should investors be…

Read more »

Surprised Black girl holding teddy bear toy on Christmas
Investing Articles

My favourite FTSE 100 passive income stock that keeps the Christmas coffers full

The holiday season is expensive and can leave many consumers struggling to make ends meet. Here’s how I use a…

Read more »

Investing Articles

The latest growth forecasts suggest the Glencore share price will hit 555p!

Harvey Jones has been disappointed by the performance of the Glencore share price since he bought the commodity stock last…

Read more »

Dividend Shares

A closer look at the 11% dividend yield forecast for Phoenix Group shares

Phoenix Group shares have one of the highest dividend yields in the FTSE 100 index today. Could this be a…

Read more »

Investing Articles

If I’d put £25,000 into the FTSE 350 at the start of 2024, here’s how much I’d have today!

Many FTSE shares have rebounded this year as interest rates look set to keep heading lower and market appetite for…

Read more »

Investing Articles

Up 40%, but experts forecast the easyJet share price could soon hit 664p! Time to buy?

The easyJet share price has been flying lately and stock analysts are predicting more fun to come. But there's only…

Read more »

Storytelling image of a multiethnic senior couple in love - Elderly married couple dating outdoors, love emotions and feelings
Investing Articles

Worried about tax raids? Here’s how I’m targeting a £44,526 passive income with shares

Investing in a Self-Invested Personal Pension (SIPP) or Individual Savings Account (ISA) can supercharge one's passive income, says Royston Wild.

Read more »