I wrote recently of a friend who got himself an introductory cash ISA rate of 6%, though that was quite a long time ago — and his intro rate was quickly slashed to near zero. And I explained how I’d look for FTSE 100 dividends that could equal that rate, but sustainably over the long term.
These days, the best cash ISA rates you can find are around 1.5%, and that doesn’t even keep pace with inflation which is currently running at 2.3%. So you’ll lose money in real terms. Some investment, eh?
While I certainly think it’s possible to secure 6% per year from a diversified basket of FTSE 100 stocks, I’ll tell you why I see one individual stock as a sustainable 6% yielder, and it’s Royal Dutch Shell (LSE: RDSB).
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Oil price
It’s perhaps obvious that Shell shares are very much dependent on the oil price, and as the price of a barrel has slipped back from its 2018 high of over $85, so has the Shell share price fallen. But here’s where I think the market is behaving erratically on that score — the price of Shell shares, in my view, should reflect the long-term balance of oil supply and demand, and not day-to-day or even month-to-month volatility.
Short-term fluctuations really do make a difference to tiny oil explorers whose ability to raise capital is closely tied to the current market value of its assets, but they’re of less importance for the giant Shell which came through the days of $30 oil without even a hint of dividend reduction.
If you’d bought Shell shares in the depths of the oil price crisis, in 2015 you could have secured a dividend yield of a massive 8.3%. And, as the dividend has been maintained since, you’d have locked in that yield based on your purchase price — and future rises would see your effective annual yield growing even bigger.
Safe?
Is the Shell dividend sustainable? I actually see it as one of the safest in the Footsie. In fact, Shell has not even once reduced its dividend since the end of World War II. When it was nowhere near covered by earnings during the recent slump, Shell kept it going through a combination of non-core asset disposal and cash reserves. While BP made a big thing of publicly saying it intended to maintain its dividend, Shell just kept quiet and carried on paying.
Forecasts for Shell put the shares on a forward P/E of 11, dropping to under 10 on 2019 forecasts. While that looks cheap, we have to bear in mind that forecasts do depend on oil prices and so they’ll likely be erratic.
Downside?
What other bearish aspects are there to Shell? There’s the thought that the world will wean itself off oil and switch entirely to renewable energy. And while I think the only long-term alternative to that is for our planet to fry through global warming, I really don’t see it happening during my lifetime. I am a long-term investor, but not a post-mortem one.
Right now, the simple maintenance of dividends at current levels would yield 6.4% on today’s share price (covered 1.5 times by forecast earnings), and I see that as an unmissable bargain. Shell is very much at the top of my list for when I next have money to invest.
