September is historically the cruellest month for investors and with the US Federal Reserve expected to hike interest rates for the first time in nine years, this one could be no different.
Rising rates could have a surprisingly pleasant impact on UK investors in BP (LSE: BP), Rio Tinto (LSE: RIO) and Royal Dutch Shell (LSE: RDSB), all of which pay their dividends in dollars. If the Fed does like rates, the dollar will put on yet more muscle, and that will feed through to your bank balance.
Given that these three stocks all yield well over 5%, they already represent income manna for many savers. Provided those dividends are sustainable, of course.
BP
It is incredible to think that almost a decade ago BP’s share price briefly topped 700p. Today, it trades at roughly half that amount, just 369p. The Gulf of Mexico blow-up, politically awkward tie-ups with Kremlin-controlled Rosneft, and the plunging oil price have wreaked havoc on the stock. The mayhem continues, with BP down 17% in the last three months.
Investors can console themselves with BP’s gushing dividends, which now yield an incredible 6.71%. That’s black gold, paid in greenbacks. The question is how long management can continue its largesse with Brent crude below $50 a barrel and falling.
BP’s second-quarter dividend was held at 10 cents a share, the same as in Q1, but up from 9.75 cents in Q2 last year. This will be converted into sterling at prevailing rates (but before the Fed meets).
BP is cutting capital expenditure in a bid to protect its dividend, spending less than $20bn this year, down from around $25bn in 2014. And it hopes that new fields such as Mad Dog 2 in the Gulf of Mexico will offset cheaper oil with higher production. But with Deepwater payouts dragging on and most analysts expecting oil to stay low, it faces a tough balancing act. A dividend cut may be the last resort. BP isn’t there⊠yet.
Rio Tinto
Yet another troubled FTSE 100 commodity company whose plunging share price has been delivered an eye-catching yield. The share price is down 25% in the last six months but the yield is at 5.69%.
Rio can’t be held responsible for its share price malaise. That is down to a factor outside its control: the increasingly troubled Chinese economy. Even if China does avoid a hard landing, investors shouldn’t expect a repeat of its metals-gobbling mania, as the economy switches from export and infrastructure growth to consumption.
A 43% drop in underlying first-half earnings to $2.9bn (down from $5.1bn) is enough to scare any income investor, but chief executive Sam Walsh is committed to the dividend. Q2 post-tax operating cash flows of $4.4 billion more than covered its $1.2bn capex and $2.2bn dividend payments. First-half cost savings of $641m helped. The dividend looks well covered at 2.3 times, but a further commodity squeeze could leave Walsh in a hole.
Royal Dutch Shell
Royal Dutch Shell’s share price is down 19% in six months while the yield has soared to more than 6.7%. Remember, that’s in paid in dynamite dollars. Shell has a long-term commitment to its dividend, which unlike BP it has never cut since the war, and that should underpin its commitment to hold the line.
Shell pays almost $12bn a year in dividends, roughly 90% of its (dwindling) annual profits. Management is combatting the oil price downturn by dumping $20bn of assets last year and this, and lopping billions off operating costs and exploration spending. Its commitment to the dividend and $25bn of share buybacks must be taken on trust for now. It may be a different story if oil ends 2016 near today’s low prices. The recent BG swoop only ups the pressure.