Image source: Olaf Kraak via Shell plc
Shell (LSE: SHEL) shares have long been popular with income investors and with good reason. Prior to 2020 (let’s face it, not a great year for most), this business was a veritable cash machine for holders. And although the pandemic did force distributions to be reset, things have been getting back on track.
Today, I’m looking at how much owners might get from FY24 as a whole and looking forward to FY25.
Above-average dividends
As I type, the FTSE 100 oil and gas giant boasts a forecast dividend yield of 4.3%. That’s higher than what I’d get from just holding a fund that tracked the index, arguably helping to compensate for the extra risk that comes with owning stock in a specific company.
According to analysts, Shell’s FY24 payout should be covered three times by profit. Now, we should always take any projections with a pinch of salt. Analysts can sometimes be wide of the mark. However, I’d be surprised if something close to the mooted 139 cents per share wasn’t handed out. As a rough rule of thumb, anything with dividend cover of above two times profit looks safe.
Safety in numbers
But it pays to expect the unexpected. As hinted at earlier, the global pandemic caused some dividend policies to be revised. Shell was forced to cut its payout for the first time since the Second World War!
This is why I’d never depend on any one stock for its dividends. I prefer to build a diversified portfolio featuring a bunch of companies from different sectors. This way, the majority should pick up the slack if one or two are forced to cut (or cancel) their cash distributions.
All that said, next year’s predictions on dividends are encouraging. According to my data provider, Shell is likely to grow the payout by 5.5% to 147 cents per share. Using today’s share price, this would be a yield of 4.5%. Again, this should be easily covered by earnings.
Cheap stock
So, how much am I expected to pay to get this dividend-payer into my portfolio? Well, actually not that much.
As things stand, the P/E ratio is a little less than eight. That’s pretty average among energy-related companies but it’s definitely cheap relative to the UK market as a whole.
One reason for this is that the sector can be very cyclical. The price of a barrel of black gold bounces around all the time. Naturally, Shell has no control over this. The biggest brains in the City can’t agree on where it’s going next either.
Worryingly, Shell stock tumbled 10% in September alone due to concerns over the global economy and, consequently, demand for oil. This latest tumble means the share price has (significantly) lagged the FTSE 100 in 2024 and the last 12 months.
Should I buy Shell shares today?
I can see an argument for owning the stock if I were solely concerned with making passive income AND wasn’t too concerned about short-term market volatility. But there’s also an argument for me avoiding Shell completely given that recent performance has pretty much negated that income stream.
Since I believe there are more defensive income shares in the UK market — and notwithstanding its long-term track record — I’m not exactly rushing to by the stock today.
