Should You Buy BP plc And GlaxoSmithKline plc For Your Income Portfolio?
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In years gone by, BP (LSE: BP) and GlaxoSmithKline (LSE: GSK) would have been automatic inclusions to income-seeking portfolios. The two companies are FTSE heavyweights, the 5th and 6th biggest companies listed on the London Stock Exchange respectively. Recent share price weakness has moved the yields on both shares north of 6%, and both companies should be seriously considered for high-yielding portfolios.
BP
Shares in BP have been under pressure recently due to the latest commodity sell-off. Currently they yield a huge 7.91% due to the tough industry environment that the company operates in. This high yield is backed up by an expected 2015 dividend cover of 0.88 and a divestment strategy aimed at selling over $10 billion worth of non-core assets. In its most recent quarterly results (Q2), BP had operating cashflows of $6.3 billion and over $33 billion of cash and short-term investments on the balance sheet. This is a strong cash-generating business that can afford to keep the dividend well into the future, even at a $50 oil price. This could be an especially good time to buy BP shares, too, as buying now will lock in the 7.91% yield, even if oil prices continue to recover and BP shares rise up to the 400-500p level.
GlaxoSmithKline
Although in a completely different sector to BP, GlaxoSmithKline shares have also been under pressure recently and its shares are down over 350p since year-highs in May. Currently the company has a yield of 6.32% and a dividend cover of 0.83, not much different to that of BP. Many financial analysts would say that GlaxoSmithKline’s yield will be slashed in the next year but, like BP, they are a heavily cash-generative business and can afford the dividend. The really exciting part of the company is that of pipeline of over 200 new drugs and treatments, the company expect half of them will hit the market in the next five years and will boost company earnings. This pipeline of new products is what attracts investors to pharmaceutical stocks and can send their stock prices through the roof. AstraZeneca (LSE: AZN), another FTSE 100 stock yielding over 4%, was subject to much takeover speculation and eventually takeover offer due to its pipeline of new drugs. This growth potential backed up by a strong dividend is what makes GlaxoSmithKline so attractive to investors.
Even if BP and GlaxoSmithKline cut their dividends, they would still be among the top 20 yielding stocks in the FTSE 100 and both have better growth prospects than many, in my opinion.
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Jack Dingwall has no position in any shares mentioned. The Motley Fool UK has recommended GlaxoSmithKline. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.