I am a seasoned freelance financial journalist specialising in global stock markets. I was formerly a stocks and commodities reporter -- and editor of print and online FX market coverage -- at Shares Magazine, providing information and analysis for readers to make sound investment decisions in the UK and overseas. I was also a regular contributor to the magazine's extensive catalogue of bookazines and trading guides. Prior to this I was a reporter with the BaseMetals.com and TheBullionDesk.com newswires, breaking the latest news and providing in-depth analyses of the base and precious metals markets.
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I’m searching for the best cheap UK shares to buy for passive income. And oil giant Shell (LSE:SHEL) has grabbed my attention this week after it announced plans to supercharge dividends.
I’ve long been a sceptic about the FTSE 100 oilie. Is now the time for me to reconsider my position?
Dividend boost
In Wednesday’s tantalising update, Shell said that between 30% and 40% of operating cash flow will be dedicated to dividend payments going forwards. This is up from between 20% and 30% previously.
And it declared that it would increase the dividend by 15% from the second quarter. Shell also said it would make further share buybacks of “at least” $5bn during the second half of 2023.
These plans will be supported by reductions in yearly capital spending, it said, to between $22bn and $25bn in 2024 and 2025. It is targeting operating cost reductions of $2bn to $3bn by 2025 to support its dividend programme, too.
So what next?
As a long-term investor, I’m unmoved by all of this news, however. To tell you the truth, I still wouldn’t touch Shell’s shares with a bargepole.
Okay, oil prices could remain rock-solid over a shorter time horizon as OPEC+ countries continue cutting output. But fossil fuel values — and with them the profitability of the oil majors — could reverse sharply over the next decade as the world transitions to green energy.
On this point, Shell’s update this week actually gave me more reason for concern than celebration. In it the FTSE firm announced plans to maintain oil production rather than make good on prior plans to cut it.
Okay, the London business said it will spend $10bn to $15bn between 2023 and 2025 “to support the development of low-carbon energy solutions including biofuels, hydrogen, electric vehicle charging and [carbon capture and storage].”
But this is a drop in the ocean compared to the huge sums it is spending on its oil operations.
A damning report
I fear that Shell could be betting on the wrong horse by peddling back on its oil reduction plans.
A report from the International Energy Agency (IEA) also released this week underlines the huge risk of Shell’s new strategy. In it the body claimed that global demand growth “is set to slow significantly,” with predicted demand growth of 2.4m barrels a day this year cooling to just 400,000 barrels in 2028.
The IEA said that:
Growth in the world’s demand for oil is set to slow almost to a halt in the coming years, with the high prices and security of supply concerns highlighted by the global energy crisis hastening the shift towards cleaner energy technologies.
Cheap but risky
On paper, Shell’s share price offers terrific all-round value today. It trades on a forward price-to-earnings (P/E) ratio of 6.3 times. And it carries a FTSE 100-beating 4.4% dividend yield for 2023.
But this cheapness reflects the enormous risk of buying the energy firm’s shares today. I believe there are much better UK shares for me to buy for passive income.
The stock price drops by the amount of the dividend on the ex-dividend date. Remember, the ex-dividend date is the day before the record date. If investors want to receive a stock's dividend, they have to buy shares of stock before the ex-dividend date.
While the dividend history of a given stock plays a general role in its popularity, the declaration and payment of dividends also have a specific and predictable effect on market prices. After the ex-dividend date, the share price of a stock usually drops by the amount of the dividend.
High-dividend stocks can offer investors income that rises over time. AOMR and BKE are some of the top dividend stocks by yield right now. A high dividend yield isn't always a good thing — some are unsustainable, and others are just the result of a low stock price.
It's a question we're frequently asked. The short answer for most people is “no”. In the short term, receiving a dividend comes at the expense of the capital value of your shareholding; shares fall by roughly the dividend amount on the Ex-Dividend Date (if you ignored all other market forces).
If you purchase a stock on its ex-dividend date or after, you will not receive the next dividend payment. Instead, the seller gets the dividend. If you purchase before the ex-dividend date, you get the dividend. On September 8, 2017, Company XYZ declares a dividend payable on October 3, 2017 to its shareholders.
There are times when it makes better sense to take the cash instead of reinvesting dividends. These include when you are at or close to retirement and you need the money; when the stock or fund isn't performing well; when you want to diversify your portfolio; and when reinvesting unbalances your portfolio.
Basically, an investor or trader purchases shares of the stock before the ex-dividend date and sells the shares on the ex-dividend date or any time thereafter. If the share price does fall after the dividend announcement, the investor may wait until the price bounces back to its original value.
What Is a Good Dividend Yield? Yields from 2% to 6% are generally considered to be a good dividend yield, but there are plenty of factors to consider when deciding if a stock's yield makes it a good investment. Your own investment goals should also play a big role in deciding what a good dividend yield is for you.
They offer both passive income and reinvestment potential that could boost overall returns. Here is why Johnson & Johnson (NYSE: JNJ), Abbott Labs (NYSE: ABT), and Pfizer (NYSE: PFE) should all be on your radar as a long-term investor. You can own a share of each for less than $1,000 all-in.
Dividend-paying stocks have the potential for income through dividends and capital appreciation, but they come with higher volatility and market risk. The choice between the two depends on your risk tolerance, investment goals, and time horizon.
If you are looking to create wealth and have a longer time horizon, staying invested in growth will enable you to enjoy longer returns. But if you are looking for a more immediate return and steady cash flow, dividend investing could be the best choice for you.
Investors who purchase a stock on its ex-dividend date or after will not receive the next dividend payment. Instead, the seller gets the dividend. Investors only get dividends if they buy the stock before the ex-dividend date.
Because investors know they will receive a dividend if they purchase a stock before its ex-dividend date, they are often willing to buy it at a premium. This often causes the price of a stock to increase in the days leading up to its ex-dividend date.
The ex-dividend date, or ex-date for short, is one of four stages that companies go through when they pay dividends to their shareholders. The ex-dividend date is important because it determines whether the buyer of a stock will be entitled to receive its upcoming dividend.
At the most basic level, you only need to own a stock by the ex-dividend date (or deadline) in order to get the dividend. And you can sell the stock a day or two after that, once everything settles. So in theory, you only need to own the stock for a couple of days to get the dividend.
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