If you’re looking for defensive income, in my opinion Royal Dutch Shell (LSE: RDSB) is one of the best stocks you can buy.
One of the UK’s top blue-chip stocks, this company has been paying an income out to investors since World War Two. It doesn’t look as if this track record is going to come to an end any time soon.
A market leader
Shell dominates the oil & gas trading markets across Europe, which gives it a dependable income stream. On top of this, the company is one of the world’s largest hydrocarbon producers. It’s also investing billions of dollars every year to build out its renewable energy business. I think these efforts will help Shell maintain its position as one of the world’s leading energy businesses for decades to come.
However, the one drawback of investing in Shell is its size. City analysts commonly use the phrase “elephants don’t run” when describing Shell and its growth prospects due to the firm’s size. The bigger companies become, the harder it is for them to grow.
Shell’s no exception. Analysts are only forecasting earnings growth of 9% this year, followed by 15% for 2020, although these numbers are entirely dependant on the price of oil.
But what the firm lacks in growth, it more than makes up for in income. Shares in the company currently support a dividend yield of 6.5% — one of the highest yields in the FTSE 100.
Considering Shell’s downbeat growth outlook, if you’re looking for capital growth, then I highly recommend combining Shell with a smaller growth stock in your portfolio. I think Tullow Oil (LSE: TLW) could be a great pick here.
After a rough few years, the business is now back on track and analysts have earnings rising from $85m in 2018 to $360m by 2020. On top of this, the firm recently re-instated its dividend and is making good headway reducing debt. Net debt declined by around $400m in 2018 and looks set to fall further for 2019.
A new discovery
Tullow is one of the most active oil explorers in Africa and its track record of finding and drilling for oil is exceptional. Management is now trying to diversify the group internationally. Its newest prospect is the closely-watched Jethro-1 well in the Orinduik block in Guyana.
Initial drilling results indicate this prospect could hold over 100m barrels of oil, above expectations. Following these findings, Tullow chief executive Paul McDade told Reuters: “It looks like we have a long-term business in Guyana.” So it would appear Tullow wants to develop this prospect as soon as possible.
Developments like the Orinduik block is why I think Tullow could be a great place to invest your money alongside Shell. Tullow’s production growth should provide capital gains while Shell continues to chuck off a steady income. This combination of income and growth could help your portfolio charge ahead.
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Rupert Hargreaves owns shares in Royal Dutch Shell. 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