Does $50 oil make Royal Dutch Shell plc a better dividend stock than Imperial Brands plc or Marks and Spencer Group plc?
With the price of oil rising from $28 per barrel earlier this year to over $50 per barrel right now, the outlook for the industry seems to be a lot brighter. Furthermore, stocks such as Shell(LSE: RDSB) have been given a boost post-Brexit vote due to their global operations and lack of reliance on the UK economy for sales.
As a result of this, many investors may now view Shell as a highly appealing income play. After all, it has a yield of 6.2% and a well-diversified and world-class asset base. Furthermore, Shell is forecast to increase its bottom line by 73% next year, which means that dividends are due to be fully covered by profit. And with free cash flow set to soar to over $20bn per annum by 2020 as it integrates the BG assets into its business, there's real potential for rapid rises in shareholder payouts over the medium-to-long term.
Despite this, Imperial Tobacco(LSE: IMB) still appears to be a more preferable income play - even after its recent share price rise. Since the EU referendum, Imperial has soared by 12% and this has squeezed its yield so it now stands at 3.8%. This is roughly in line with the FTSE 100's yield, but the scope for rapid dividend rises is high for investors in Imperial.
That's because its bottom line is forecast to rise by 12% this year and by 7% next year as e-cigarette sales plus pricing improvements act as positive catalysts. And with the company's payout ratio expected to rise due to it being a rather modest 66%, there's scope for dividends to increase at a much faster pace than profit.
Imperial is also a more preferable income play to Shell because of its reliability. The oil price could easily fall and put pressure on Shell's ability to increase dividends, while the long-term outlook for tobacco and e-cigarettes is very robust.
While Shell offers a high yield, Marks and Spencer's(LSE: MKS) yield is even higher at 7.4%. However, today's quarterly update from the retailer shows that it's struggling in a challenging operating environment. For example, food sales fell by 0.9% on a like-for-like (LFL) basis in the first quarter of the year versus the same quarter of last year. Furthermore, clothing and home sales declined on the same basis by a large 8.9% and although part of the reason for this is an investment in pricing, the uncertain outlook for consumers means that further investment will probably be needed.
As such, the short-to-medium term could be a difficult one for M&S and its investors. The fallout from Brexit could be severe. However, with dividends being covered 1.5 times by profit, they seem to be sustainable over the medium term. Therefore, alongside Shell, Marks and Spencer appears to be a sound income play for long-term investors, with Imperial being the preferred option due to its more certain outlook.
Is this the best income play ever?
Despite this, there's another stock that could be an even better buy. In fact it's been named as A Top Income Share From The Motley Fool.
The company in question could make a real impact on your income prospects in 2016 and beyond. And in time, it could help you retire early, pay off your mortgage, or simply enjoy a more abundant lifestyle.
Click here to find out all about it - doing so is completely free and comes without any obligation.
Peter Stephens owns shares of Imperial Brands, Marks & Spencer Group, and Royal Dutch Shell. The Motley Fool UK has recommended Royal Dutch Shell B. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.