With interest rates standing at historic lows and inflation on the rise, life’s getting harder for income-seeking investors. Generating a real-terms return from cash is nigh on impossible, while bonds are also exposed to the dangers of a rapidly rising price level. That’s why high-yielding stocks such as BP (LSE: BP) offer huge appeal at the present time.
BP currently yields 6.7%, which puts it among the highest yielding companies in the FTSE 100. Although the price of oil has fallen dramatically in the last couple of years, the deal agreed by OPEC last week provides a degree of hope in its future performance.
The cartel will restrict oil production in future, which could help to reduce the glut of supply that has affected prices. While demand growth may still be sluggish, the rebalancing of demand and supply should give support to the price of black gold and help to improve BP’s profitability over the medium term.
BP’s dividend is due to be covered just 1.05 times in the 2017 financial year. This is clearly a narrow coverage ratio and provides BP with a lack of headroom when making payments to shareholders. However, with the price of oil likely to rise over the coming years, BP can afford to have a generous dividend in the short run.
As well as a cut in supply from OPEC, the oil industry should also benefit from continuing high demand from the emerging world in particular. Clean energy may be adopted during the next decade, but oil and gas is still likely to be a key part of the energy mix for China, India and developed countries such as the US. Therefore, increasing car ownership and rising energy needs should ensure that demand for oil remains robust in the long run. This should positively catalyse BP’s earnings and dividends.
Stable dividend
BP’s balance sheet and cash flow also remain strong. They show that the company’s dividend is relatively secure. Also offering a stable and resilient dividend is FTSE 100 peer Vodafone (LSE: VOD). It currently yields 6.5% and with it due to record a rise in earnings of 18% this year and 23% next year, there’s scope for a rapid rise in the company’s shareholder payouts in the medium term.
Of course, Vodafone’s strategy is largely responsible for its growth prospects. Its decision to focus on buying undervalued assets in Europe could start to bear fruit, while the decision to diversify into new product areas such as broadband is likely to provide cross-selling opportunities alongside a more robust income stream.
As with BP, there’s no guarantee that Vodafone will continue to perform well, nor that its dividends will rise rapidly. However, both stocks have such high yields and bright futures that they appear to offer wide margins of safety. For income-seekers, they both offer compelling opportunities for the long term.
