Income investors are set to take a sizeable hit after popular dividend stock Royal Dutch Shell (RDSB) shocked the market with the first cut to its dividend in 80 years.

Many UK equity income funds hold Shell, with 19 allocating over 5% of their portfolio to the oil and gas giant, according to data from FE Analytics.

They are all set to be impacted after Shell cut its first quarter interim dividend by 66% from 47 cents per share down to 16 cents, while its share price fell over 7% to £13.45, which will also weigh on the funds’ performance.

Only one investment trust, the Merchants Trust (MRCH), has more than 5% of its portfolio in Shell shares with a 5.3% weighting. Despite the bad news from Shell, Merchants share price dipped just 0.6% to 392.6p.

Based on the roughly 8bn shares there are in the company, Shell shareholders would have been in line for £3.7bn in dividends for the first quarter of this year if the payout had been maintained. But today’s cut has knocked £2.4bn off that figure, with investors instead taking a £1.3bn payout.

Commenting on the dividend cut, the chair of Shell’s board Chad Holliday said, ‘Shareholder returns are a fundamental part of Shell’s financial framework.

‘However, given the risk of a prolonged period of economic uncertainty, weaker commodity prices, higher volatility and uncertain demand outlook, the board believes that maintaining the current level of shareholder distributions is not prudent.’


Among income funds available to retail investors, the one with the highest allocation to Shell is Aberdeen Standard Investments’ UK Equity Index Managed (BDZRCP5) with 7.7% of the portfolio, followed by UBS UK Opportunities (B806NQ09) with 7.5% and JP Morgan UK Equity Plus (BW4Q9B1) at 6.6%.

Some UK income fund managers are starting to react to the news of Shell’s dividend cut.

Chris McVey, manager of FP Octopus UK Multi Cap Income (BG47Q33), said the cut could cause investors to take a ‘much closer look’ at the underlying holdings in their portfolio make sure they’re diversified, ‘and not reliant on a small number of stocks to generate income.’

Analysis by Octopus Investments revealed Shell is a top ten holding in two thirds of funds in the UK Equity Income sector, ‘highlighting the significant concentration’ within the sector, McVey adds.


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Issue Date: 30 Apr 2020