For many dividend chasers both Lloyds Banking Group (LSE: LLOY) and Royal Dutch Shell (LSE: RDSB) will no doubt be on the radar.
Lloyds is expected to keep its progressive dividend policy rolling with a 3.3p per share payout forecast by City analysts for 2018, up from 3.3p last year and yielding a mighty 5.7%. And for 2019 a 3.6p dividend is predicted, thus the yield steps to 6.2%.
In contrast to the Black Horse Bank, annual dividends at Shell aren’t expected to march northwards any time soon. There are two disclaimers that investors need to consider, however: the first, a predicted payout of 188 US cents through to the close of 2019 yields a monster 5.4%. And secondly, the oil leviathan is returning boatloads of cash to its shareholders through share buybacks.
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I certainly believe that both businesses have the financial clout to make good on forecasts. At Shell, free cash flow continues to improve and for the April-June quarter this stood at $9.5bn, up from $5.2bn three months earlier, reflecting steps to rebuild the balance sheet as well as the impact of resurgent oil prices.
And for Lloyds, the near-term dividend outlook also looks robust following the painful restructuring measures it has undertaken over the past 10 years. It is certainly one of Britain’s best-capitalised banks and this enabled it to complete its own share repurchase scheme earlier this year.
Risky business
However, Lloyds’ share price has steadily declined since the turn of 2018. This is a reflection of its murky profit outlook in the near term and beyond. This week it touched levels not seen since the months after the 2016 EU referendum, and this comes as no surprise as the chances of Britain slipping out of the trading bloc without a deal increase.
Indeed, the odds of a catastrophic Brexit are rising by the week, as Betway recently highlighted when it cut the odds of a so-called no-deal exit to 5/6 from 6/4 previously. The bookie puts the chances of a disorderly Brexit at exactly 50% and for my money this is far too high to invest in the likes of Lloyds.
The business has already seen the number of bad loans almost double in the six months to June 2018 from the same period last year, and the number is only likely to increase should the economy take a massive Brexit-related hit. Needless to say, revenues should sink as well due to Lloyds’ lack of overseas exposure.
Another scary selection
On the face if it Shell may appear the safer selection. The surge in oil prices has been dominating the financial pages in recent days, the extended upturn in crude prices driving the Brent benchmark through the $85 per barrel barrier for the first time in almost four years earlier this week.
I’m still not tempted to buy into Shell though. With pumping activity ratcheting up across non-OPEC nations, the chances of heavy crude surpluses re-emerging remain high. And with that, another crash as we saw back in the summer of 2014, when Brent famously toppled from peaks of $115 per barrel, could well be in the offing.
Lloyds and Shell both come cheaply, the firms boasting forward P/E ratios of just 8 times and 12.9 times respectively. But there are plenty of better low-cost dividend shares that Footsie investors can choose from today. And for this reason I’m avoiding both of these businesses.
