A lot of people believe the stock market is a money machine, where it’s extremely easy to turn a few hundred pounds into tens of thousands of pounds overnight. Unfortunately, the reality couldn’t be further from the truth. Yes, some great investors have managed to turn a few hundred pounds into millions, but for the majority of investors, the reality is that they will earn a lower return than the wider market.
Indeed, a study conducted by financial research firm DALBAR, gave some worrying figures. It said that the average investor realised an average annual return of only 3.7% a year over the past three decades. That’s not great as it means they were underperforming the wider market by around 5.3% each year.
So what’s going wrong? There are many reasons why this happens. Chasing high-risk low-reward opportunities is one of the most common. One of the biggest misconceptions of investing is that you need to buy risky AIM stocks if you want to achieve above average returns. You don’t. You can do just as well with blue chips.
One such opportunity currently exists in Royal Dutch Shell Plc (LSE: RDSB).
Double your money
Shell is a FTSE 100 stalwart and also one of the UK’s top dividend paying stocks. However, the recent oil market gyrations have sent shares in Shell plunging, and the company’s dividend yield has spiked. At one point earlier this year the yield was closing in on 9%, more than twice the FTSE 100 average at the time. As shares in Shell have rallied over the past few months, the yield has fallen to 7.6%.
A yield of 7.6% implies that if you buy shares in Shell today, you can double your money in less than 10 years. By using the rule of 72, I estimate that it will take 9.5 years to double your investment in Shell with dividends alone.
The above calculation is only an estimate. It assumes that all dividends received from Shell during the period are reinvested at the same rate of return, and there’s no capital growth. Nonetheless, it’s clear that an investment in Shell right now will produce above average returns for the next decade. In fact, just by buying shares in Shell today and reinvesting the dividend income you could significantly outperform the average investor profiled in the above DALBAR study.
Is the dividend safe?
Having said all of the above, during the past 12 months some City analysts have voiced their concern about the sustainability of Shell’s dividend payout as oil prices remain depressed. To try and convince the City that the payout is here to stay, Shell’s management has committed the company to asset disposals and an aggressive cost-cutting plan to maintain margins. Even though earnings per share won’t cover Shell’s dividend payout this year, City analysts expect the payout to be fully covered next year as the price of oil recovers and efficiency savings take hold.
So overall, as a long-term investment Shell looks to be a great opportunity.