Why I'd buy Royal Dutch Shell plc and Rank Group plc for their dividends and growth potential

I reckon oil and gas giant Royal Dutch Shell(LSE: RDSB) has crossed many an investor's radar recently because of the stock's strong showing on quality, value and momentum indicators. And I'm interested, too.

But the share price chart reveals how vulnerable the firm is to the market price of the commodities it produces. There's a great vee-shaped valley in the chart that mirrors the movement of the price of oil, with a low in the winter of 2016. But in today's full-year results report, Shell declares that earnings benefitted from higher oil, gas and liquefied natural gas (LNG) prices during the year.

Robust trading

The figures are robust. Cash flow from operations came in 73% higher than a year ago at $35.65bn, of which free cash flow is around $27.6bn. Earnings per share lifted 172% to $1.58, but the directors held the dividend flat at $1.88, which seems prudent since earnings don't fully cover the dividend payment. That said, the dividend does enjoy decent cover from cash flow.

As well as higher oil prices, improved refining performance and higher production from new fields drove up earnings and offset the effect of field declines and divestments. Operationally, Shell seems to be performing well and I'd be happy to ride the momentum and collect the dividend yield running close to 5.5%, at today's 2,477p share price. However, I'm wary that things will only remain this rosy as long as the oil price holds up. So my finger would remain close to the ejector button if I took a position in the shares, so constant vigilance is the way forward.

Emerging growth

Gaming services provider RankGroup (LSE: RNK) is another firm with a good record of achieving annual increases in earnings per share and a rising dividend. The company's traditional high street bricks-&-mortar business is struggling to make progress, but there's a vibrant and fast-growing online operation within the business that could go on to ensure good returns for investors in the years to come.

Today's half-year report is encouraging. Although like-for-like revenue was just 1% higher than the equivalent period a year ago,  adjusted earnings per share scored a 16% rise and cash from operations shot up 19%. In a sign of the directors' ongoing confidence in the outlook, they pushed up the interim dividend by 8%.

Operational challenges

Chief executive Henry Birch said in the report that the good figures came in despite new gaming duty rules on customer bonuses, and in the face of a more challenging retail trading environment on the high street during H1. I'm not too worried about a possible declining high street market in the case of Rank, because operating profit from UK digital operations achieved a massive 56% uplift compared to the year before, accounting for 27% of overall operating profits. If that rate continues, Rank could emerge as a high-growth proposition on the market, as long as the firm's traditional business doesn't deteriorate further and offset the progress that digital is making.

At today's share price near 226p, the price-to-earnings ratio for the current year is below 14, and the dividend yield is around 3.6%, suggesting that the market is not asking us to overpay for Rank's potential.

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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has recommended Royal Dutch Shell B. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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