Royal Dutch Shell’s 5% Dividend Yield (Part 1): Beats Junk Bonds:
Investing is often all about trade-offs and lately plenty of income investors have been trading off quality for yield. The more than $30 billion in net inflows into junk bond funds over the past 12 months has been a willful shimmy down the quality ladder in search of yields that manage to outpace inflation.
Before you make that tradeoff you might want to check out Royal Dutch Shell (RDS.B). The second largest integrated oil and gas company, behind Exxon Mobil (XOM), has a current dividend yield of 5%. That’s not just double Exxon’s dividend yield, it is more than double the 2.375% coupon on a 20-year bond Shell floated this past August. And it’s even more than the average yield on BB-rated corporate bonds (The highest tier of junk):
This from a company with a AA financial credit rating from Standard and Poor’s and Aa1 from Moody’s.
Yes, of course, stocks aren’t bonds. But junk bonds aren’t exactly bond-like either in downturns. Here’s the total return (price and yield) for a leading junk ETF, the SPDR Barclays High Yield Bond ETF (JNK) and Shell’s B shares during the worst of the financial crisis.
(Note: Shell has A and B shares. Dividend income from the A shares (RDSA) entails mandatory 15% withholding from the Dutch government. The B shares don’t have the withholding. While you can get a tax credit for the A share withholding, it’s easier for U.S. investors to opt for the B shares.)
While there’s no guarantee Shell will never reduce its dividend, its current balance sheet suggests that’s highly unlikely, as seen in the company's payout ratio.
Now of course there’s got to be a reason why Shell’s dividend yield is so high. In the next article, we take a look at how Shell and Exxon Mobil have been faring during this down cycle in the energy sector. And in the third installment of Shell-under-the-microscope we’ll size up whether there’s a long-term case for Shell, or if this is the beginning of a long sojourn as a value trap.
NEXT: Shell's huge investment in the future.
Carla Fried, a contributing editor at ycharts.com, has covered investing for more than 25 years. Her work appears in The New York Times, Bloomberg.com and Money Magazine.
Filed under: Company Analysis