There comes a time in everybody’s life when they wake up to the importance of saving for retirement. The earlier that moment comes, the better off you will be.
Drifting on into your 50s is leaving things a bit late, but don’t despair, any action you take now will not go to waste. You could keep things simple by investing in a low-cost exchange traded fund (ETF) tracking a major stock market index such as the FTSE 100. The iShares Core FTSE 100 ETF is one of the cheapest.
If you are happy buying individual stocks and shares, there are hundreds to choose from, so you need to narrow it down. These two oil majors are two of the largest of all, and offer some of the most generous dividends.
Royal Dutch Shell
Anglo-Dutch ‘supermajor’ oil company Royal Dutch Shell (LSE: RDSB) is the single biggest UK stock listed by market cap, a massive £177bn, and boasts a proud history of never cutting its dividend payouts since the Second World War. That kind of reliability is important, as that will underpin your retirement income.
That history came under threat two or three years ago, as the oil price plunged, but management tenaciously held onto its payout, and it looks safer today with the oil price at around $62 for a barrel of Brent crude. The dividend is still the best reason to invest in Shell, as it currently offers a forecast yield of 6.6%. That is well above the FTSE 100 average of 4.4% and almost seven times the interest paid by the average ISA, which is just 0.95%.
The dividend is also underpinned by massive cash flows – $12.1bn in the last quarter alone.
Now the Shell share price hasn’t done particularly well lately, it is trading at similar levels to five years ago, but the income more than makes up for that. The stock is also relatively cheap, trading at 10.2 times current earnings, well below the index average of around 17 times.
Fellow FTSE 100 supermajor BP (LSE: BP) is the UK’s fourth biggest company, valued at a whopping £99bn. The sheer size of these two oil giants shows just how important they still are for the global economy, even as the world looks towards a future beyond fossil fuels.
The BP share price is up 10% over the last five years, roughly in line with FTSE 100 growth, while the dividend is juicy at 6.5% a year, covered 1.2 times by earnings. BP trades at 13.4 times earnings, slightly pricier than Shell, but hardly demanding.
BP also boasts robust underlying cash flow generation, which stood at $6.4bn in the most recent quarter, and should help to keep those dividends flowing.
There is an underlying worry when investing in oil companies, as they are set to come under growing pressure from campaigners and governments concerned about climate change. BP’s outgoing CEO Bob Dudley recently said they remain a vital part of the current energy mix, and said oil company efforts to secure a lower carbon future are “realistic”. But if you are uncomfortable with that, we have plenty more ideas for you on the Motley Fool.
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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2019