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 (NYSE: RDS-A) (NYSE: RDS-B) as a dividend investor's dream stock. Here's why this energy industry bigwig deserves the title.
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 1.73%) and Magellan Midstream Partners (MMP +0.00%) 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:
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) 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.
