Are dividends under threat at BP plc and this income stock?

Could BP plc (LON: BP) and this income peer be about to cut their dividends?

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While obtaining a high dividend yield can boost an investor’s income, the reality is that dividend sustainability may be more important than a headline yield. After all, a high yield is of little use if the company paying it will not be able to afford it over the medium term.

With BP (LSE: BP) currently being one of the highest-yielding shares in the FTSE 100, it has become a more enticing income play for investors. However, with the oil price continuing to be volatile, could it and this other popular dividend stock be about to slash their shareholder payouts?

Improving outlook

With the oil price having experienced a highly challenging period in recent years, it is perhaps unsurprising that BP’s payouts have not been covered by profit for several years. Despite this, the company has refused to slash dividends, preferring instead to maintain them as it seeks to generate high total returns for its investors.

This year though, things are about to change for the company. Its bottom line is forecast to increase by around 42% due in part to a higher oil price. This means that its dividends are due to be fully covered by profit in the current year. And with further growth in earnings of 9% due next year, its shareholder payouts are expected to be covered 1.2 times by profit in 2019. This suggests that not only are they highly sustainable at their current level, they could even deliver growth over the medium term.

Of course, BP’s future profitability hinges to a large extent on the direction the oil price takes. In recent weeks it has enjoyed significant growth and is now at its highest level in around four years. While its future performance may prove to be highly volatile, the oversupply situation which has held back its performance in recent years is forecast to not return during the current calendar year. Therefore, the prospects for the company’s profitability and dividend seem bright.

Impressive performance

Also offering an impressive income outlook is gaming company Rank Group (LSE: RNK). It reported strong first half results on Thursday which show that it continues to deliver improving sales and profitability. Versus the prior year’s first-half period, revenues increased by 16% and operating profit was up 14% before exceptional items. This meant that adjusted profit before tax rose 17% despite the introduction of new gaming duty rules on customer bonuses.

The company’s performance was impressive given the more challenging retail trading environment experienced during the period. This suggests that it may be able to outperform many of its sector peers in what may prove to be a difficult period for the industry.

With a dividend yield of 3.6% and dividends being covered twice by profit, Rank Group appears to have a highly sustainable future from an income perspective. In fact, it could generate inflation-beating income growth for its investors over the long run.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens owns shares in BP. The Motley Fool UK has recommended BP. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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