Should I Buy Royal Dutch Shell or SSE?

LONDON -- Energy producer Royal Dutch Shell  (LSE: RDSB  ) (NYSE: RDS-B  ) and utility firm SSE  (LSE: SSE  ) (NASDAQOTH: SSEZY  ) are both FTSE 100 income stalwarts, with dividend yields of 5% or more.

I already own shares in both companies, but would like to top up my holding in one of them. Which company currently looks the better buy?

Shell vs. SSE
Let's start with a look at a few key figures for each company:

 

Royal Dutch
Shell

SSE

Price-to-earnings ratio

8.1

13.2

Dividend yield

5.1%

5.4%

5-year average dividend growth rate

3.6%

7.8%

1-year share price growth

10.9%

18.3%

The FTSE 100 has risen by 25% over the last year, meaning that despite decent gains, the share prices of both SSE and Shell have underperformed the index.

However, SSE has been the stronger performer of the two, probably helped by its 14-year record of above-inflation dividend growth. SSE's dividend has grown by an average of 7.8% per year over the last five years -- more than twice Shell's dividend growth.

I think that SSE's current P/E of 13.2 is sufficient for a firm that cannot be expected to deliver strong growth, but Shell's current P/E of just 8.1 looks very attractive to me, especially given the firm's 5.1% dividend yield.

What's next?
If government bond yields start to rise, then utility shares tend to fall in order to preserve their yield advantage over bonds. We've seen this happening this week -- so are utility stocks about to slide, and is Shell about to come back into favor?

Analysts' forecasts are notoriously unreliable, but FTSE 100 companies generally get the benefit of the most comprehensive analysis, and tend to deliver fewer surprises than smaller companies.

With that in mind, let's take a look at some forward-looking numbers for these firms' current financial years:

 

Royal Dutch
Shell

SSE

Forecast P/E ratio

8.3

13.2

Forecast dividend yield

5.1%

5.6%

Forecast dividend growth

8.1%

4.5%

Forecast earnings growth

10%

1.5%

Analysts are expecting Shell to increase its full-year dividend by 8.1% this year. The firm's first-quarter dividend rose by 5%, so an 8% increase over the whole year doesn't look unrealistic.

Although lower, SSE's forecast dividend increase of 4.5% should keep its payout firmly ahead of inflation, and equates to a juicy prospective yield of 5.6%, at the firm's current share price of 1,560 pence.

Which share should I buy?
As a shareholder in both companies, my aim is to top up my holdings at the most attractive prices possible, with a view to long-term capital appreciation and a rising dividend yield on cost.

Based on this, the decision is easy: Shell is a better buy than SSE at current prices, and will probably be the next addition to my portfolio.

The best FTSE 100 dividends?
Shell and SSE are both tempting income buys, but neither of them was selected for the Motley Fool's latest special report, "5 Shares to Retire on"

The Fool's team of expert analysts crunched the numbers on every share in the FTSE 100 when researching this free report, and the five companies they chose all offer high-quality, reliable dividends.

If you would like to know the identity of these five top-rated dividend investments, click here now to download your copy of this report -- it's free, but availability is strictly limited, so don't delay.

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