I’d buy 9,595 shares of this dividend stock to generate an extra £200 of monthly passive income

BP shares currently have an eye-catching dividend yield of 5.1%. This makes them an excellent opportunity to make some passive income on the side.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

White female supervisor working at an oil rig

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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?

Created with Highcharts 11.4.3Bp P.l.c. PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

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.

Should you invest £1,000 in Bunzl Plc right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Bunzl Plc made the list?

See the 6 stocks

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.

But here’s another bargain investment that looks absurdly dirt-cheap:

Like buying £1 for 31p

This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

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.

Muhammad Cheema 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.

More on Investing Articles

Investing Articles

10 UK shares that are 50% or more off their 52-week highs

These UK shares have been hit hard. And Edward Sheldon believes there could be some opportunities for those with a…

Read more »

Man smiling and working on laptop
Investing Articles

Could IAG’s share price surge over the next year? These analysts think so!

IAG's share price has sunk, reflecting growing concerns over the impact of trade wars on airline profits. Is this a…

Read more »

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

£10,000 invested in Apple shares last week is now worth…

Apple shares are down 18% over the past week. It’s a truly phenomenal downward movement, but investors may want to…

Read more »

Investing Articles

Are shares like Tesco a safe haven for investors?

Christopher Ruane sees a lot to like about Tesco shares. But does he see them as a safe heaven in…

Read more »

Young mixed-race woman looking out of the window with a look of consternation on her face
Investing Articles

The 2025 stock market sell-off could be a once-in-a-decade opportunity to build wealth in an ISA

If a long-term investor has cash sitting in an investment ISA, now could be a good time to put some…

Read more »

pensive bearded business man sitting on chair looking out of the window
Investing Articles

Is now a good time to start buying shares?

Stock market turbulence can be alarming, but it can also offer opportunity. Our writer considers whether now could be the…

Read more »

Investing Articles

Hunting for passive income? These falling insurance giants offer 10% yields

The UK insurance sector is typically a good place to look for attractive dividend yields. Dr James Fox details two…

Read more »

Investing Articles

Considering a Stocks and Shares ISA this April? Avoid these mistakes!

When opening a Stocks and Shares ISA for the first time, it's easy to fall foul of some costly mistakes.…

Read more »