Investing a £20k ISA in dirt cheap BP shares would give me £1,320 a year passive income

Oil giant BP is set to yield 6.6% this year, making it one of the most exciting sources of passive income on the entire FTSE 100.

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BP (LSE: BP) shares have treated loyal investors to heaps of passive income over the years, and the next 12 months look highly promising.

The oil giant’s stock is forecast to yield a thumping 6.6% in the year ahead and incredibly, that payout is covered 4.1 times by earnings. It’s a rare and happy sight to see such a high yield with so much protection.

Look at those dividends

Investors in BP have plenty more to be happy about at the moment. Its share price has rocketed 53.19% over two years and 20.7% measured over the last 12 months.

I’m usually wary of jumping onto stocks after they’ve had a good run, but now may actually be a buying opportunity as BP shares have tumbled 10.49% in the last month.

As ever, share price performance is closely tied to the oil price. BP’s shares crashed during the 2020 pandemic, as oil tankers floated the seas looking for buyers and crude fell below $20 a barrel, only to soar in last year’s energy shock.

Brent crude has fallen 8.2% so far this year to $72.57 a barrel, despite China ending its Covid lockdowns, and could slide further if the US falls into recession. If it does, the shares could be even cheaper than they are today.

BP does more than simply drill oil. The FTSE 100 giant also makes huge sums from gas, renewables and energy trading, giving it a financial cushion when oil falls. In fact, its energy trading arm has the opportunity to make more money when energy markets are volatile.

If I invested my full £20,000 Stocks and Shares ISA allowance into BP shares today and that 6.6% yield comes through, I’d get income of £1,320 a year, or £110 a month. That’s a tempting return although I don’t have the courage to throw so much cash at just one stock.

Getting ready to buy

I’m willing to invest up to £5,000 into BP shares, which would give still give me passive income of £330 a year. Better still, that should rise over time, assuming BP management continues to reward loyal shareholders.

It’s been more than generous lately, announcing a further $1.75bn share buyback over the next three months, on top of $2.75bn in the last quarter. Personally, I’d prefer the money paid as a dividend straight to me, but I can’t have everything. 

As ever, neither dividends nor buybacks are guaranteed. And share price growth obviously isn’t. So to reduce the risk I might split my £5k stake into two or three chunks, taking advantage of any dips.

Big international companies like BP have risks to match their size. Campaigners have renewed calls for another windfall tax as punishment for its $5bn Q1 profit. BP still has net debt of $21.2bn. Investing in the energy transition will be expensive, and until management convinces markets it’s serious about renewables, it will continue to be excluded from most environmental, social and governance (ESG) portfolios.

Yet it has defied the sceptics and gloom-mongers before. Remember peak oil? Apparently, we were going to run out of the stuff. The world still needs big oil, and I need BP’s passive income stream in my ISA portfolio.

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.

Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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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