As I saw the news that Chevron was purchasing Anadarko Petroleum in a $33 billion merger deal, I revisited Royal Dutch Shell’s $50+ billion acquisition of BG Group several years ago that doubled down on Shell’s status as a colossus in the industry, boosting the annual revenues from the $360 billion to $430 billion range.
It is the dominant force. There are maybe one dozen companies in the entire world that sell as much “stuff” as Shell does. It is sitting on 16 billion barrels of oil and 40 trillion cubic feet of natural gas. Whatever world the energy uses, Shell is there with its hand as an original source provider, cultivator/refiner, and transporter of the energy source. If I had to make a list of the 50 companies most likely to exist as a profitable entity by the end of your great-grandchildren’s expected lives, Shell would be on the list.
What makes the company otherwise noteworthy is that, because it brings in $24 billion in annual profits per year, it only has limited reinvestment opportunities each year so it ships off large chunks of its profits to shareholders as dividends. And because the world generally regards these mammoth oil conglomerates as stuffy and boring, they typically have higher dividends yields than most other market sectors. With Royal Dutch Shell specifically, a starting dividend yield of 5% usually comes with the territory.
The high income can be quite significant for those who are trying to augment their household’s income. When you find a publicly traded stock with a sustainable five percent dividend yield, it is axiomatic that it will take $20,000 to add $1,000 to your household’s annual income. While putting aside the capital may require some diligent effort, the payoff can be extraordinary because you will own all the income that those 325 shares (or whatever the exact amount may be) throws off for the rest of your entire life.
Take, for example, someone who has spent the past ten years putting $100 per month into Royal Dutch Shell stock. The price of the stock has fluctuated tremendously in a band between $36 and $88 over that time frame, with a median purchase price of $47.49. Our investor would have bought 252 shares of Shell, that would have generated $1,945 in income that would have been reinvested at an average price of $47.32 (the reason for the difference is because there is nothing being reinvested during the original/entry purchases until the first quarterly dividend is paid out).
Confucius had it right when he said, “The man who moves a mountain begins by carrying away small stones.” The seemingly small allocation of $100 per month, sustained over a real period of time, leads to dramatic results. With a decade of putting $100 per month into Shell, someone would end up with 252 shares purchased outright, 41 shares acquired through dividend reinvestment, and 293 shares in total that are worth around $18,900 generating $1,101.68 in annual income.
All of this created for the cost of what a household might spend going out to eat 2-3 times per month. The introduction of cash-generating assets onto your household’s balance sheet changes everything because once you have a few under the belt, it becomes more enjoyable to add more and to keep building because the foundation is in place so the sense of hopelessness that can act as a major deterrent when one has nothing is no longer acting as a barrier to intelligently deploying your money.
I have always had a soft spot for Shell because it gives its owners large amounts of money in the form of ongoing dividends compared to the initial capital deployed, and though the stock seems to “crash” every few years, the wealth keeps getting build, with dividend reinvestment a simple reason why.
I used $100 per month in my example. Scale the results accordingly if $250, or $500, or even $1,000 were put into Shell stock on a regular basis. Buffett had it right in his 2012 Berkshire Hathaway letter, “Time is the friend of the wonderful business.” It’s your task to identify the wonderful businesses, and get your hands on some shares to your name, so the passage of time can become your friend financially.