I would buy 3,442 Shell shares to generate an extra £300 in monthly passive income

THE FTSE100 currently has a dividend yield of 3.5%. Therefore, the best stocks in the index for generating passive income will outperform this one.

There are many options to choose from. However, a sharing recently caught my attention: Shell (LSE:SHEL).

The company typically announces its dividend in dollars and then announces its equivalent in pounds sterling. On September 9, it announced that it would be 26.15p per share for the quarter.

My income opportunity

I will ignore future currency differences and assume 26.15p is the constant dividend going forward. The annualized amount is therefore 104.6p.

At the time of writing, Shell is trading at £24.45 per share. This means I would have to spend £84,156.90 on its shares to earn an extra £300 per month (granted dividends are not guaranteed). I appreciate that this is an extremely large amount of money that you can’t just find at the bottom of the couch!

But I also don’t believe that this additional income will be maintained at this level. Shell has a very good track record of increasing its dividend over time. If I reinvest my dividends in its shares, it could help speed up the process.

The risks

Shell has only cut its dividend once since World War II, and that was during the pandemic. This shows the company’s strength to persevere through difficult times. It should be noted, however, that if a similar event were to occur, the company could find itself facing a similar situation.

At the time, it cut its dividend by 66%. All things being equal, if it were the same today it would equate to me needing £191,000 to reach the same £300 per month.

The pandemic is a once-in-a-lifetime event (hopefully!), so I don’t think it will happen again, especially as governments are better prepared for such scenarios.

But the main reason payments to investors were reduced was its effect on oil prices.

Shell is heavily exposed to fossil fuels like oil, which the world will eventually move away from. This is a clear risk to its future earnings.

However, we still have a long way to go before the demand for fossil fuels disappears. In fact, this figure is expected to increase until at least 2030. This gives the company enough time to invest in alternative and cleaner energy.

And now ?

Over the past six months, Shell’s share price has fallen 10%. It is especially disappointing, especially since the Footsie rose by almost 4%.

But it presents an opportunity for an income investor, like me. To get the future dividend stream from its stock, I can now pay 10% less than I should have paid six months ago.

With a forward price-to-earnings (P/E) ratio of just 7.8, its shares are also quite cheap. Therefore, if I had the money available, I would buy some today.