Oil giant Shell (LSE: SHEL) is one of the most formidable dividend stocks on the FTSE 100, yet it has slipped below my radar in recent years.
I decided it was too expensive after last year’s energy price surge sent its profits and share price soaring, while eroding the yield. So I turned my attention to other income opportunities, such as my most recent purchase Legal & General Group.
L&G currently yields a thumping 8.27% and trades at 6.1 times earnings. Shell is almost as cheap trading at just 7.6 times earnings, but the yield doesn’t compare.
There may be income ahead
I’d got used to Shell shares yielding 5% or 6% a year, so today’s yield of 3.8% is at the low end. It’s only slightly above the FTSE 100 average of 3.5%. However, on closer inspection, the outlook is much more promising.
Shell’s dividend is covered a whopping 3.8 times by earnings, which gives management plenty of scope to increase it. The forecast yield is now a mighty 6.4%, which is more like it. That’s still covered 3.8 times by earnings, so there could be more progression to come.
If I invested my full £20,000 Stocks and Shares ISA into Shell shares today, I would hope to generate tax-free income of £1,280 over the next year. So is now a good time to invest?
Shell’s profits are still climbing even as stellar gas and oil prices fall back to earth. It earned on average $81.7 per barrel of oil sold in the first quarter, down from $102.2 a year ago. Yet that’s still comfortably above its breakeven point of around £40 for deepwater oil.
Last week, Shell posted a Q1 net profit of $9.65bn, with its trading division buoyant and liquefied natural gas prices holding up. Cash flows fell 37% but still totalled $14.2bn. The company also announced a new $4bn share buyback while holding its dividend at $0.2875 per share.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
Oil prices are volatile
No dividend is entirely safe. Shell lost its proud post-war record of maintaining shareholder payouts during the pandemic. The oil price is highly volatile, crashing below $30 a barrel in 2016 and to just $15 in 2020. It could fall if the world falls into recession this year, which could send the Shell share price crashing and disrupt dividends.
Another danger is that Shell’s share price is up 78.98% over three years. I can’t expect a repeat of that if I buy today. Although measured over 12 months, its stock is up just 4.25% and it certainly doesn’t look expensive.
Shell faces other challenges, such as rising to the challenge of net zero, while campaigners are pushing for another windfall tax on oil company profits. Despite the risks, I would happily buy its shares at today’s low valuation, with the aim of holding them for at least 10 years and ideally much longer.
However, my portfolio isn’t big enough to pour my full £20,000 ISA allowance into just one stock. Instead, I’d consider investing £5,000 this year. That would give me forecast annual income of £320 that I would reinvest to build up my stake (and future income stream) over time.
The post Investing a £20k ISA in dirt cheap Shell shares would give me income of £1,280 a year appeared first on The Motley Fool UK.
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More reading
- I’d buy 1,100 Shell shares for £1,000 a year in passive income
- Should I buy the FTSE 100’s largest energy stock?
- Investing in Shell shares: looking beyond the near term!
- After a 5% drop this year, the Shell share price looks very cheap
- Shell’s share price is rising. Is the stock worth buying today?
Harvey Jones has positions in Legal & General Group Plc. 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.