Please ensure Javascript is enabled for purposes of website accessibility

Why Royal Dutch Shell Is a Dividend Investor's Dream

By John Bromels - Updated Oct 21, 2019 at 5:17PM

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

The top oil industry company not only pays well, but does so through thick and thin.

There are plenty of great dividend stocks out there, but in order to be termed a "dividend investor's dream," an investment has to go above and beyond just offering a high yield. It has to be a solid company, too, and stack up well not only against its peers, but against other stocks in its sector.

Given all that, I'm proposing Royal Dutch Shell (RDS.A) (RDS.B) as a dividend investor's dream stock. Here's why this energy industry bigwig deserves the title. 

A smiling young man stands in a cloud of paper currency

Investors should seek out top stocks to help their dividend portfolios outperform. Image source: Getty Images.

Biggest (yield) of the big

A dividend investment can hardly be termed a dream stock if it doesn't pay a high enough yield. Luckily, Royal Dutch Shell does. In fact, Shell's current yield of 6.5% is tied with rival BP for the top spot among the oil majors. 

Shell has other advantages over its big oil peers that should keep it performing well enough to maintain its best-in-class (well, tied-for-best-in-class) dividend status. Its return on capital employed -- a metric measuring how effective management is at deploying its resources -- is 11.2%, higher than any of the other oil majors. Its price-to-earnings ratio is also the lowest of its peer group at 11.7 (lower is better for this metric), indicating that Shell may be undervalued compared to other big oil companies. 

A top dividend yield supported by top management and an attractive valuation puts Shell well on its way to being called a dream stock for dividend investors. But it isn't enough to just compare Shell to other oil majors; we should also look at how it stacks up against other high-yielders in the oil and gas sector. 

Structured for everyone

One big plus that Shell has over some other high-yielders in the energy sector is that it's structured as a corporation, rather than a master limited partnership (MLP). Energy infrastructure MLPs like Enterprise Products Partners (EPD 1.11%) and Magellan Midstream Partners (MMP 1.03%) are well known as being dividend powerhouses. Enterprise and Magellan, though, have similar yields to Shell's. All three are currently yielding above 6%. 

Enterprise and Magellan are both solid investments, but they may not be right for everyone's portfolio. The MLP structure has strict rules, including that MLPs must pay out almost all of their operating cash flow as distributions to unitholders, in return for big tax advantages. But those same rules mean that MLPs may not be permitted in certain types of accounts, including some retirement accounts. There are also some extra reporting requirements at tax time for MLP owners. 

Shell's stock, on the other hand, doesn't have all those hoops to jump through. That contributes to its dream status for dividend investors. 

Through thick and thin

Enterprise and Magellan might seem to have another advantage over Shell: Each has a better track record of regularly increasing its distributions. The MLPs have raised their payouts every quarter for more than 15 years. Shell, on the other hand, put dividend increases on hold in 2015 in response to the oil price downturn of 2014-2017. However, that doesn't necessarily make Shell a worse dividend investment.

All three companies have seen similar share price declines since the start of the oil price downturn:

EPD Chart

EPD data by YCharts.

In fact, Shell (the red line) has actually held its value better than Enterprise or Magellan. And even though the others have been increasing their payouts (in absolute terms) every quarter, Shell's yield (the percentage it pays out to investors) is currently the highest:

EPD Dividend Yield (TTM) Chart

EPD Dividend Yield (TTM) data by YCharts.

Plus, Shell deserves credit for not cutting its dividend during the oil price downturn, when many oil companies were forced to do so. That indicates that Shell's dividend is going to be solid through good times and bad.

A dream to own

It's not enough for a company to offer a juicy dividend yield. The stability of that yield -- and of the company as a whole -- are important when evaluating an investment. Luckily for income-focused investors, Shell not only has a high yield and a stable payout, but other structural advantages like top-notch management and a non-MLP structure that give it a leg up. 

Income investors should feel confident that Shell is a dream stock to have as part of a balanced dividend portfolio.

John Bromels owns shares of BP. The Motley Fool recommends Enterprise Products Partners and Magellan Midstream Partners. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Royal Dutch Shell plc Stock Quote
Royal Dutch Shell plc
Enterprise Products Partners L.P. Stock Quote
Enterprise Products Partners L.P.
$26.41 (1.11%) $0.29
Royal Dutch Shell plc Stock Quote
Royal Dutch Shell plc
Magellan Midstream Partners, L.P. Stock Quote
Magellan Midstream Partners, L.P.
$50.16 (1.03%) $0.51
BP p.l.c. Stock Quote
BP p.l.c.
$30.44 (0.75%) $0.23

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/11/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.