I want to diversify my income streams. But I’m also a bit lazy, so I don’t want to do much work to achieve this. This is where dividend stocks come in. I can entrust management to take care of the public company and generate a healthy profit. They can then distribute this to me in the form of dividends. Aside from researching the company and keeping up to date with its activities, there’s very little for me to do. This makes it the ultimate form of passive income.
BP (LSE:BP) shares look like a great option for this. The company announced its second-quarter results for 2024 on Tuesday (30 July). It raised its dividend from 7.27 cents per share to 8 cents. This is a 10% rise, yet its share price has fallen by 1.2% since the news. Does this present a buying opportunity?
The dividend opportunity
If I use the Bank of England exchange rate of 1.2793 at the time of writing on 2 August, that 8 cents dividend per share is equivalent to 6.25p.
If we assume that is the new quarterly rate going forward, then the annualised dividend is 25.01p.
At the time of writing, the share price is 449.40p. Therefore, to make an extra £200 a month (bearing in mind that dividends aren’t guaranteed) I’d have to spend £43,119.93 to purchase 9,595 of its shares.
Now, I appreciate that’s no measly sum. However, City analysts are predicting further dividend increases through 2025. There’s strong justification behind this as well because ever since September 2020, the company has raised its quarterly dividend at least once annually.
That means I’m likely to see this extra income rise over time too. If I were to reinvest my dividends back into BP shares, I could also accelerate the rate of growth of my second income.
A strong quarter
Other than its dividend, BP enjoyed a good quarter.
The company uses replacement cost profit as a measure of its net income. This reflects the replacement cost of its supplies (by excluding inventory holdings gains and losses and their associated tax effect). This was $2.8bn when analysts were only expecting $2.6bn.
Furthermore, its net debt fell from $24bn in the first quarter to $22.6bn.
Cash flow has also been trending upwards, rising from $5bn in the first quarter to $8.1bn this quarter. This is also a great improvement over the $6.3bn generated in the second quarter last year.
Now what?
My one concern with BP is that the world will eventually trend away from fossil fuels. This will be a major challenge for the company, especially as its performance tends to operate similarly to the performance of oil prices.
However, oil demand is still expected to rise until at least 2030. Goldman Sachs researchers think it could even increase through to 2034, which is great for BP. Moreover, the company is planning for a world after fossil fuels by pumping large sums into renewable energy.
It also has a very cheap forward price-to-earnings (PE) ratio of 7.9. Therefore, if I had the spare cash, I’d buy some of its shares today.
