The FTSE 100 currently has a dividend yield of 3.5%. Therefore, the best shares in the index to generate a passive income will have a yield above this.
There are plenty of options to choose from. However, one share caught my attention recently: Shell (LSE:SHEL).
The company usually announces its dividend in dollars and later announces the sterling equivalent. On 9 September, it announced this would be 26.15p per share for the quarter.
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My income opportunity
I will ignore future foreign exchange differences and assume the 26.15p is the constant dividend going forward. The annualised amount is therefore 104.6p.
Whilst writing this, Shell is trading for £24.45 per share. That means I’ll need to spend £84,156.90 on its shares to make an extra £300 a month (with the understanding that dividends aren’t guaranteed). I appreciate this is an extremely large sum of money that you can’t just find in the back of the couch!
However, I don’t believe this extra income will remain at this level either. Shell has a very strong track record of raising its dividend over time. If I reinvested my dividends back into its shares, this could help accelerate the process.
The risks
Only once since World War II has Shell cut its dividend, which was during the pandemic. This shows the strength of the company to persevere through tough times. However, it must be noted that if a similar event occurred, the firm could be forced into a similar situation.
Back then it reduced its dividend by 66%. All else being equal, if it did the same today, this would equate to me needing £191k to achieve the same £300 a month.
Now, the pandemic was a once-in-a-lifetime event (hopefully!), so I don’t think this will happen again, especially as governments are more prepared for such scenarios.
But the main reason the payout to investors was reduced was because of its effect on oil prices.
Shell has a large exposure to fossil fuels like oil, which the world will eventually trend away from. This is an obvious risk for its future income.
However, we’ve still got a long way to go before the demand for fossil fuels goes away. In fact, it’s meant to rise until at least 2030. This gives the company plenty of time to invest in alternative and cleaner energy.
Now what?
Over the last six months, Shell’s share price has fallen by 10%. This is mostly disappointing, especially as the Footsie has climbed by almost 4%.
But this presents an opportunity for an income investor, like myself. To obtain the future stream of dividends from its shares, I can now pay 10% less than what I would have had to six months ago.
With a forward price-to-earnings (P/E) ratio of just 7.8, its shares are also quite cheap. Therefore, if I had the spare cash, I’d buy some today.
