In fact, the FTSE 100 heavyweight is up 29% over the 12 months. The stock soared this year on the back of rising oil and gas prices — largely resulting from the disruption caused by Russia’s invasion of Ukraine. Moreover, margins have been pretty good in the downstream and retail parts of the business too.

Happy shareholders

Many analysts didn’t expect oil companies to come back so strongly after the pandemic when crude prices had temporarily turned negative. In fact, if I had bought Shell shares two years ago, I would now have seen 143% growth. The returns have been massive and the dividend yield has moved from around 4.5% to just over 3%.

Can this bull run continue?

Shell’s profitability is largely dependent on the prices it can obtain for hydrocarbon products. But it operates in a cyclical industry. This means that when demand is strong and prices are high, the company’s margins can soar. However, when economic activity is waning around the world — as it is now — demand for oil and gas products falls, along with the price.

On Thursday, Shell reported operating profits of $9.5bn for the third quarter of 2022, lower than the three months before, but still more than double the same period in 2021. Shell had originally been forecast to report net earnings of $10.5bn in the third quarter. However, the business warned earlier in the month about the impact of waning gas prices.

Currently, Shell is trading near its 52-week high. But, for me, that’s a concern. While performance has been excellent this year, the global economy is starting to turn. Growth in all major economies, including China, the US, the UK and the EU, is sluggish, with recessions forecast across the board.

We’ve already seen oil production cut by OPEC, but crude prices are down 25% from summer highs. Natural gas prices have fallen further. Earlier this week, European gas prices fell below €100 per megawatt hour for the first time since June. Prices in the UK dropped to 180p per therm on Monday, down 72% from its peak.

I’m not buying yet

I’m actually pretty bullish on oil and gas in the long run. The reason is that I believe we’re entering an era of enhanced competition for resources and this, in general, will push prices upwards.

However, I’m not buying Shell shares now because I think there will be better entry points later in the year. I believe that lower economic activity around the world will push hydrocarbons prices, and Shell’s margins, down.

As such, I’m holding off on buying Shell shares until the share price cools.

Shell’s gushing profits

At the current share price, Shell is valued at £171.2bn — a far cry from the levels it crashed to during 2020’s Covid-19 crisis. Indeed, almost exactly two years ago (on 29 October 2020), I said Shell shares were an unbelievable bargain. Back then, they traded at 866.4p, because Shell was going through hell. Had I bought at this low, low price, I’d have almost tripled my money by now. Wow.

In its latest results, Shell unveiled a third-quarter profit of $9.5bn (£8.2bn) — double that for the same period of 2021. Also, the group made record profits in the first half of 2022, thanks to gushing oil prices. As well as sending Shell stock higher, this news lifted BP shares to 482.25p, up 16.25p (3.5%) since Wednesday.

I’m expecting big profits from BP

Shell rewarded shareholders with a new $4bn share-buyback programme, as well as a 15% hike in its quarterly dividend. Yet British politicians were shocked to learn that the group had paid no UK windfall tax, thanks to its heavy drilling costs in the North Sea.

Turning to BP, the group announces its third-quarter 2022 results on Tuesday, 1 November. With Shell leading the way, will BP’s results and share price follow a similar trajectory?

With the price of a barrel of Brent crude trading close to $95, I’m expecting BP to have made money hand over fist in its latest quarter. What’s more, the company’s cash flow should be huge, despite a major outage at its US refinery in Whiting, Indiana.

BP shares have already soared in 2022

Then again, the BP share price has already gushed higher in 2021-22. Here’s how it has performed over six different timescales:

As I said, BP shares have had a good run, jumping almost a quarter in the past six months and zooming up almost by almost half this calendar year. This makes BP shares (and Shell stock) among the FTSE 100‘s best performers in 2022. Today, BP has a market value of £87.3bn — still a somewhat modest valuation when set against Shell’s vast capitalisation.

I’ll wait a while to buy BP shares

Earlier today, the BP share price hit a 52-week high of 483.15p, before easing back slightly. This has reduced the group’s dividend yield to under 3.7%, but this could rise if its next results allow. As for me, I shall hold off buying shares until I see BP’s latest financials. But I would prefer to own BP stock before this year is out!

• Adjusted earnings of $9.5bn, beating analyst expectations of $9bn
• A $4m share buyback programme, expected to be completed within three months
• Q3 dividend of 25 cents per share (same as Q2)
• Q4 dividend (paid in March 2023), expected to be 15% higher subject to board approval

The potential Q4 dividend increase, which smashed analyst expectations, will please shareholders. The buybacks — which now total almost $19bn for the year — should support Shell’s share price. Shell’s Q3 2022 adjusted earnings were less than the bumper $11.5bn reported for Q2. But they were more than double the $4.1bn announced for Q2 2021. Adjusted earnings for the first nine months of 2022 are almost double what they were in the whole of 2021.

There are plenty of projects that should keep money flowing. Shell announced this year that it had been selected as a partner in Qatar’s North Field east expansion and North Field South gas projects. It is developing another gas project in Malaysia. And importantly for the future, a hydrogen project in Holland got the go-ahead in July this year. Also, Shell bought an Indian company that develops and manages solar and wind farm projects in August 2022.

Volatile energy prices

How much money Shell makes in the future depends on the price of oil and gas, among other things. Dividends and share buybacks are likely to fall if energy prices cool after recent highs. The European benchmark for gas was up 250% from the start of the year in August. However, Shell is a cyclical business. The price of oil and gas has fallen since the highs in August. Yes, winter is coming, and might see prices move higher. But how about beyond? That is something I have no confidence in forecasting.

Shell’s latest quarterly results have prompted fresh calls for a windfall tax on oil and gas producers. This will happen every time the company and its peers report above-average profits, particularly when there are concerns that citizens will struggle to heat their homes. This is a risk that I cannot ignore, as if a windfall tax is implemented, there is no way of knowing its size and, thus, its impact on the company’s ability to reward its shareholders.

Renewing interest in Shell shares

Oil and gas has to be an industry in decline if the world is serious about net-zero targets and climate change. That, and the growing antipathy to oil majors, might explain why Shell is trading at a P/E multiple of around seven. The company is pivoting towards a renewable energy future, and that’s a big change. However, Shell has expertise in managing big energy projects. I believe it will leverage that expertise in renewables, and the transition will be successful.

On balance, I should buy Shell shares right now as the company seems well-positioned to take advantage of the volatility in the energy markets. But, beyond that, the company also makes sense to me mid to long term. However, I already own a position in Shell in my Stocks and Shares ISA, and I am happy with the size of my allocation and, therefore, won’t be adding to it today.

Gushing free cash flow

In its Q3 results released today, Shell reported earnings of $9.5bn. That’s over double what it reported in the same period last year. EBITDA (earnings before income tax, depreciation and amortisation) was 60% higher, standing at $21.5bn.

Despite these impressive figures, they’re down slightly on Q2 as oil prices have come off their highs of $120, reached earlier in the year.

Growing dividends and buybacks

One of the primary reasons for investing in Shell is for its dividend. When the pandemic struck, it shocked the market by reducing it by 66%. It’s now seeking to woo investors back by steadily increasing dividends.

In Q3, it announced a dividend per share (DPS) of 25 cents, unchanged from last quarter. In Q4, however, DPS is earmarked to rise 15%. If that dividend were maintained, my calculations are that the stock would provide a yield of 4.2%.

Admittedly, Shell’s dividend yield is hardly headline-grabbing. However, the company continues to buy back its own stock at an increasing rate.

Throughout 2022, it’s expecting to buy back $18.5bn of its own shares. Over the next quarter alone, it has earmarked buybacks totalling $4bn. As a result, total distributions to shareholders will be in excess of 30% of cash flow from operations (CFFO). Given that at the nine-month mark, CFFO stands at $46bn, shareholders are been handsomely rewarded.

Commodities bull market

Over the last year, I’ve written extensively about the oil and gas industry. While many investors have given the sector a wide berth, wary about its medium-term prospects, I continue to remain bullish.

Back in June when oil stocks began selling off, I was in favour of taking a contrarian stance. Since then, the commodities sector has bounced back strongly. So where do I go from here?

Since reaching a peak of $120 in June, the oil price has slowly been declining. However, this decline needs to be set in a wider context.

In a bid to increase supply, the US government has been selling off its strategic petroleum reserves (SPR) at a record rate over the past year. At this rate, the SPR will be zero in 18 months.

Elevated levels of inflation are forcing central banks to push up interest rates. As the world economy heads into a likely deep recession, demand will undoubtedly take a hammering.

Yet despite these two huge macro forces bearing down on it, the oil price continues to hold up well. The reason is that inventories remain extremely tight. It’s the lack of supply coming online in the years ahead that’s the real driver for oil prices to remain elevated.

Levels of capital expenditure across the industry remain depressed. Solving this issue will involve international consensus around energy security. Until addressed, I expect the Shell share price to continue to perform well. That’s why I recently increased my position in Shell.

High oil and gas prices have allowed CEO Ben van Beurden to ramp up dividend payments after cutting the payout in 2020. However, Shell’s dividend is still only half what it was in 2019.

What’s more, the stock’s forecast dividend yield of 3.9% is less than the 4.1% predicted for the FTSE 100 in 2022.

Shell’s dividend growth is expected to slow from next year. Does it still make sense to buy the shares for income today? Here’s what I think.

Some good news

Shell’s dividend certainly looks very safe to me now. This year’s payout is expected to be covered five times by earnings. That compares to a long-term average of around two times earnings.

The chief executive has also been taking advantage of record profits to cut debt. Shell’s net borrowings have fallen from $79bn in 2019 to less than $50bn at the end of June.

This business has been gushing cash over the last year or so. But I think there are signs that the good times may be coming to an end.

Are profits about to fall?

Shell’s latest quarterly update revealed a sharp change in market conditions in recent months. The company said that a slowdown in demand for plastics meant that its chemicals business was expected to have lost money during the third quarter.

Fears of a recession have also seen petrol and diesel prices fall. Shell says that profit margins at its refineries are expected to have averaged $15 per barrel, down from $28 per barrel during the second quarter. That’s expected to reduce underlying profits by at least $1bn.

Profits from oil production and gas trading are also expected to be lower. Despite record energy costs for consumers, wholesale gas prices have actually fallen recently.

Shell shares: what I’d do now

Despite the global drive to reduce carbon emissions, I don’t think we’ll stop needing fossil fuels any time soon.

In my view, Shell is likely to remain an important part of this business. I think the group’s gas reserves, in particular, could be a great asset as countries gradually transition away from higher-emitting fuels such as coal and oil.

However, I think Shell’s dividend policy tells its own story. The company could afford to pay a much bigger dividend this year. But instead of doing this, Shell is using its spare cash to repay debt and buy back its own shares.

This strategy suggests to me that Shell’s management expect profits to be lower in the future. They may also be preparing the ground for higher levels of investment in new projects, including renewables.

Don’t get me wrong. I think Shell looks fair value at the moment and am confident the dividend will be safe for the foreseeable future. But I don’t see Shell shares as a best buy for income now. I think there are better choices elsewhere for dividend investors today.

Smoking hot?

The shares in Imperial Brands (LSE:IMB) have performed comparatively well recently. In the past six months, they’re up 17% and currently trade at 1,990p.

The firm – a cigarette manufacturer – has a very attractive dividend yield of 6.98%. For the year ended September 2021, the company paid a dividend of 139.08p. 

I’m aware that dividend policies may be subject to change in the future. But it’s good to know that I could derive this relatively high level on income. 

The firm also published sparkling results for the year ended September. In the report, the business stated that it had traded in line with expectations. Furthermore, it’s embarking on a £1bn share buyback scheme. This is appealing to me, a potential investor, because it means the possibility of more income. 

These schemes are essentially ways for companies to return profits to shareholders. They’re an indication that the business is in a strong financial state of health. 

There is, of course, the threat posed by inflation. It’s possible that higher costs and wages could lead to diminishing profits. Despite this, the firm has increased its market share across many important economies in Europe.

A high oil price

Second, Shell (LSE:SHEL) shares have been volatile of late, having climbed nearly 11% in the past six months. At the time of writing, they’re trading at 2,349.5p.

The oil and gas giant paid a dividend of $0.89 per share in 2021. At current levels, this equates to a yield of 2.82%

The business has been benefiting from markedly higher oil prices. These have been caused by heightened demand following the pandemic. Furthermore, a perceived supply shortage after the Russian invasion of Ukraine sent prices to well over $100 per barrel. 

Unsurprisingly, for the three months to 30 June, the company posted profits of $11.5bn. In addition, its refining profit margin per barrel tripled, quarter on quarter, to $28 per barrel. 

One concern of mine is whether oil prices can remain elevated for long. The factors leading to the price spike may also be resolved in coming months. Despite this, the winter period may bring with it increased demand for oil for customers to heat houses.

Overall, both of these well-established businesses boast solid dividends. Underpinned by strong results, it’s likely that these dividend policies could continue for the foreseeable future. With that in mind, I’ll add both companies to my portfolio soon.

But let’s take a closer look at what’s been moving the Shell share price, and explore whether I’m too late to buy stock in this oil giant.

Five-year trend

If I had invested £500 in Shell shares five years ago, today I’d have about £502, plus dividends. It’s not that the share price has stayed still. It’s quite the opposite. The share price plummeted in 2020 when the pandemic hit and oil even went negative for a brief period when traders couldn’t find buyers for hydrocarbons products.

In fact, over the last two years, which takes us back to September 2020, the Shell share price is up a huge 148%. It’s clear that the company’s fortunes have really turned around over the past 24 months. However, it is worth remembering that peaks and troughs are expected in cyclical industries as demand waxes and wanes.

A bumper year, but its outlook is souring

Shell shares have soared this year on the back of rising oil prices. In fact, margins have been pretty good in the downstream and retail parts of the business too. And it’s not just oil, Shell, like other hydrocarbons companies, extracts and sell natural gas. As we all know, the spot price of natural gas has gone through the roof this year.

But, like other investors, I am trying to work out what the operating environment will look like in six-12 months, as well as further into the future. And there is some uncertainty here.

The global economy is expected to weaken this year and that could bring crude prices down as low as $45 next year, according to Citi analysts. In fact, since that forecast, we’ve already seen OPEC+ reduce oil production once, and the nations could commit to much larger cuts in October and November.

Will it be enough to keep oil prices where they are? It’s hard to tell. But it is clear amid weakening economic forecasts in Europe, China and elsewhere in the developing world, that there is downward pressure on oil prices.

Too late to buy, or too early?

Shell operates in a cyclical industry, so I knew this bumper year wouldn’t last forever. Personally, I think I’ve missed this year’s bull run so I won’t be buying now. In fact, I expect to see the share price fall towards the end of the year as oil demand weakens.

However, I’m pretty bullish on the long run, so I’d consider buying at a better entry point later in the year. There are two reason for this.

Firstly, two major demand shocks in the last seven years have made oil producers a lot leaner. And that means breakeven points have come down — all in all, I find them more attractive businesses today than they were a decade ago.

Secondly, I contend that we’re entering a period of scarcity and enhanced competition over the long run, and this will push prices up. Companies like Shell will benefit.

Here are three dividend-paying companies with news coming our way in October.

Housing cash

Housebuilders had been suffering as interest rates were rising. And now that it looks like the Bank of England could be forced into even bigger hikes by the slump in the pound, fears are growing further.

As the final week of September progressed, more and more mortgage lenders withdrew mortgage deals as costs became increasingly uncertain.

Against that background, Bellway will deliver full-year results on 18 October. Bellway shares have fallen 50% in value over the past 12 months.

The results will be pretty much out of date even before they’re posted. But I’ll be watching for any hints at how business has gone since year-end, and where the company thinks its outlook is going.

If it holds, the forecast dividend would yield 6.6% this year.

Fund management

The whole investment management business has slumped, with companies suffering cash outflows as investors seek safety elsewhere. Jupiter Fund Management (LSE: JUP) is among them, with a whopping 60% share price fall over the past 12 months.

Jupiter should be releasing a third-quarter trading update on 20 October, and I’ll be looking for anything that might affect the dividend.

For the first half, the company maintained its dividend of 7.9p per share, unchanged since the same period a year previously. At the time, Jupiter said it “remains a well-capitalised business with a strong balance sheet“.

If the board also maintains the final payout, we could see a whopping 18% full-year yield. But there’s big uncertainty there, considering the worsening economic outlook.

Oil dividends

Oil and gas shares have been among the best performers in 2022. BP shares are up 30% over the past 12 months, while Shell (LSE: SHEL) has climbed 40%.

We’ll have a Q3 update from Shell on 27 October. Oil is dropping a bit, to around $85 for a barrel of Brent Crude. But I still expect to see the cash flowing strongly.

Forecasts put this year’s dividend yield at 3.9%, which is not one of the biggest around. But it’s one of the few in the FTSE 100 that haven’t been boosted by falling share prices in 2022.

Analysts see the dividend holding steady over the next couple of years. But that depends a lot on where the oil price goes. Any further declines could put recent share price gains at risk.

Verdict

There are clearly risks with all of these, and they might not be my top picks in their individual industries. But they’re all in sectors that I think have solid long-term dividend potential.

Market leader

One is FTSE 100 supermarket leader Tesco (LSE: TSCO). The competition might be growing, and Lidl and Aldi might be rubbing their hands with glee as shoppers chase rock-bottom prices.

But Tesco still commands 27% of the UK’s grocery market, with Sainsbury a distant second at 15%. Tesco is going to take some shifting if anyone wants to try.

First-half results should be with us on 5 October, and so much seems to have happened since Tesco’s first-quarter update back in June.

At the time, total retail sales (excluding fuel) had grown 2% on a like-for-like basis from the prior year. Sales were up 9.9% from three years previously. And that famous market share had edged up a bit.

The Tesco share price has shown some weakness, dropping 25% in the past 12 months.

But that’s pushed the stock’s forecast price-to-earnings (P/E) ratio down to around 9.5. And dividend yields are heading above 5%.

FTSE 100 bank

Standard Chartered and NatWest Group have Q3 updates coming on 26 October and 28 October, respectively. But my sights are directed more to Barclays (LSE: BARC), with third-quarter figures due on 26 October.

Like financial stocks in general, the Barclays share price has fallen, down 25% in the past 12 months.

In this case, it puts the stock on a P/E of only around 5.4. The long-term average for FTSE 100 stocks is close to three times that, which makes Barclays look cheap on that score.

The forecast dividend yield is pushing 5%, with analysts lifting their predictions above 7% by 2024. How forecasts might hold up if we face a prolonged recession is the big unknown here.

One thing I do like about Barclays is its international exposure, which could help defend it against specific UK-centric dangers.

Oil & gas

Oil and gas stocks have had a good year, as oil prices have climbed. And that brings me to Shell (LSE: SHEL), with a Q3 update due on 27 October.

The Shell share price has gained 35% in the past 12 months, and profits are climbing. In 2021, earnings were almost back to pre-pandemic levels. And forecasters predict a bumper year this year.

The dividend yield is around 4%, which is not close to the FTSE 100’s best. But it is being held down by the rising share price.

The price of oil has declined some way from its summer highs, with Brent crude dipping below $90 per barrel. And that’s got to be a big risk now. If oil carries on down, I’d expect the Shell share price to lose some of its gains.

Buy in October?

I don’t know if I’ll buy any of these three stocks. Not without doing my proper research, certainly. But at least I’ll be better informed by following October’s updates.

Oil power duo

Two standout performers have been from the oil sector. BP (LSE:BP) shares are up 54% in the past year, with Shell (LSE:SHEL) topping the FTSE 100 chart with an impressive 61% gain over the same period.

The main reason for the move higher in both stocks has come from the price of oil. For example, a year ago the price of Brent Crude was around $72 per bbl. It’s now at $90 and spent a good portion of H1 above $100.

This has been great for the oil majors, which can benefit from a higher price for the oil extracted. The risk is that this is a temporary blip, given the disruption of supply caused by the Russia-Ukraine crisis. Yet although I agree on the root cause, I don’t think that the price of oil is going to materially head lower over the next year.

The rebound in demand from the pandemic means that there’s a higher base level now, including everything from airlines to haulage companies. Further, a bear market for stocks and bonds doesn’t necessarily follow through to a commodity like oil. This is because it’s a tangible asset that actually gets used, meaning that the supply is constantly required.

On that basis, I think both oil stocks could outperform over the next year. With free cash, I’d be keen to add both to my portfolio.

Top UK insurance stock

Another company that has outperformed in the past year is Beazley (LSE:BEZ). The FTSE 250 specialist insurer has experienced a jump in its share price of 60%.

The business services a broad range of areas, including marine, aviation and cyber security. As such, the diversification achieved helps to ensure that it has demand from the businesses it services. In the recent half-year results, it achieved the best combined ratio figure since 2015.

The combined ratio is a profitability measure that’s mainly used in the insurance sector. It takes into account underwriting losses, expenses and other factors. Ultimately, if the percentage figure is above 100 it’s a bad thing, with anything below 100 being good. The latest figure for Beazley was 80%.

I think that this UK stock can continue to move higher even during an economic downturn. Insurance is a stable sector, with many businesses needing to take out insurance products as a priority. If companies go bust during a recession then there’s a risk of lower demand and some default risk on the policies taken out. However, I don’t see this as a huge issue overall, so am looking to buy the stock with free cash.