When interest rates fall, the shares that pay dividends become more attractive. This is because in a rapidly declining environment the so-called safe-harbor assets, such as government bonds and bank savings accounts, are almost nil, which means that investors have to look for other ways to achieve a decent return.
With the US declaring an interest rate cut as the next step instead of a generally expected interest rate increase, it is probably a good time to scan the dividend-paid margin and look for companies that have made returning money priority for investors. Today we are concentrating on two super-majors of oil to see which fit best with this strategy.
1. Royal Dutch Shell
It is difficult to ignore Royal Dutch Shell (NYSE 🙂 among oil super majors when it comes to earning a hefty dividend. The company pays $ 0.94 a share per quarter, which translates into a dividend yield of 6% on yesterday's price.
The shares closed 1.4% at $ 63.62 on their fourth consecutive profit day yesterday. They have so far increased by 9.5% this year and, despite the trials of recent years, have increased by 17% in the last decade
In the latest strategy update on Tuesday, the Anglo-Dutch oil company predicts a much stronger cash flow in the coming years. That could mean that the producer is in a better position to raise the dividend that it has kept flat over the past four years.
Shell says it has the potential to spend $ 125 billion on dividends and buy back shares between 2021 and 2025. The company paid $ 16 billion in annual dividends last year on top of the current buy-back program that averages slightly less than $ 10 billion a year.
That predictions can, however, be optimistic if the current fall in oil prices continues. Shell shares did not do well after the oil crisis in 2014, after the company's debt had increased following the massive takeover of BG Group. Since then, Shell has worked aggressively to reduce its debt and has given investors money back as a priority.
In our opinion, Shell is much better prepared this time to cope with a sustained rise thanks to the company's aggressive debt reduction strategy, supported by its plans to sell $ 30 billion worth of assets
2. Exxon Mobil
Exxon Mobil Corp (NYSE :), another global oil producer, offers a different risk-return comparison if you are looking for higher dividend yields. After a drop of 8% in the last three months, its share now yields around 4.7% dividend revenue, much higher than the five-year average of around 3.5%.
The company pays $ 0.87 per quarter, a payout of more than 5% per annum in the past five years.
Unlike Shell, Exxon has increased its dividend for more than 30 years in a row, even though it operates in a highly volatile sector. This performance says a lot about the quality of the company's balance sheet and the ability to generate superior returns for shareholders.
The shares closed 1.8% yesterday, at $ 74.31, and have risen 9% since early 2019. The performance of the share in the past 10 years was not spectacular, but it still got 1.8% at the time.
Compared to pure upstream players, Exxon is better able to withstand the decline in the energy markets due to the enormous scale and diversification of assets. The dominant position of the company in upstream, downstream and chemical industries helped it to remain profitable even during recessions and periods of serious consolidation of the commodities market.
Bottom Line
Both companies offer a different appeal for long-term investors. If you're an oil bull, Shell's juicy dividend yield is worth considering, especially as the company's efforts to restore its balance sheet produce results. As oil prices improve from here, Shell has an attractive asset mix to produce robust cash flows with the potential for growing dividends.
The return of Exxon may not be that tempting, but the company is one of the best players in the oil trade. The balance sheet is strong, the dividend payment ratio is manageable and the company has a huge growth plan. We love both shares for buy-and-hold investors with the aim of earning a fixed income.
