Shell plc (LON:SHEL) has passed our checks and is about to pay a dividend of $0.25

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Shell plc (LON:SHEL) The stock is set to trade ex-dividend in three days. Typically, the ex-dividend date is one business day before the record date which is the date a company determines which shareholders are eligible to receive a dividend. The ex-dividend date is important because the settlement process involves two full business days. So if you miss this date, you will not be on the company’s books as of the record date. This means investors who buy Shell shares on or after May 19 will not receive the dividend, which will be paid on June 27.

The company’s next dividend payout will be $0.25 per share, following last year when the company paid a total of $1.00 to shareholders. Calculating the value of last year’s payouts shows Shell has a 3.5% return on the current share price of £23.035. Dividends contribute greatly to investment returns for long-term holders, but only if the dividend continues to be paid. We therefore need to check whether dividend payments are covered and whether profits are increasing.

Discover our latest analysis for Shell

Dividends are usually paid out of company profits, so if a company pays out more than it has earned, its dividend is usually at risk of being reduced. That’s why it’s good to see Shell pay out a modest 35% of its profits. A useful secondary check can be to assess whether Shell has generated enough free cash flow to pay its dividend. Fortunately, it only paid out 21% of its free cash flow last year.

It is encouraging to see that the dividend is covered by both earnings and cash flow. This generally suggests that the dividend is sustainable, as long as earnings don’t drop precipitously.

Click here to see the company’s payout ratio, as well as analysts’ estimates of its future dividends.

LSE:SHEL Historic Dividend May 15, 2022

Have earnings and dividends increased?

Stocks of companies that generate sustainable earnings growth often offer the best dividend prospects because it is easier to increase the dividend when earnings increase. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to sell strongly at the same time. That’s why it’s heartening to see Shell’s revenue skyrocketing, up 38% a year over the past five years. Earnings per share have grown very rapidly and the company is paying out a relatively small percentage of its earnings and cash flow. This is a very favorable combination that can often lead to dividend multiplication in the long run, if profits increase and the company pays out a higher percentage of its profits.

Another key way to gauge a company’s dividend outlook is to measure its historical rate of dividend growth. Shell’s dividend payouts per share have fallen by an average of 5.1% per year over the past 10 years, which is uninspiring. It is unusual to see earnings per share increase at the same time as dividends per share decrease. We’re hoping that’s because the company is reinvesting heavily in its business, but it could also suggest that business is lumpy.

To summarize

Should investors buy Shell for the next dividend? Shell increased its earnings per share while simultaneously reinvesting in the business. Unfortunately, it has cut the dividend at least once in the last 10 years, but the conservative payout ratio makes the current dividend look sustainable. Overall, we think this is an attractive combination and worthy of further research.

Although it is tempting to invest in Shell just for the dividends, you should always be aware of the risks involved. To help you, we found 2 warning signs for Shell (1 should not be ignored!) which you should be aware of before buying the shares.

A common investment mistake is to buy the first good stock you see. Here you can find a complete list of high yielding dividend stocks.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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