The last five years have been quite brilliant for BP (LSE:BP.) shares. The British energy giant’s strategic pivot back to fossil fuels has paved the way for some solid growth. And subsequently, shareholders have reaped an impressive 122% share price return since November 2020.
However, with the energy stock offering a tempting 5.6% dividend yield today, income investors have started taking an interest in this business. And looking back since 2020, the passive income generated by BP has been equally impressive.
One thousand pounds was roughly enough to buy 508 shares five years ago. And without reinvesting any dividends along the way, that was enough to generate a total passive income of $671.73 (£506.83). Don’t forget BP shares pay dividends in US dollars.
| Year | Dividend Per Share (¢) |
| 2020 (Q4) | 5.25 |
| 2021 | 21.42 |
| 2022 | 22.94 |
| 2023 | 27.76 |
| 2024 | 30.54 |
| 2025 (Nine Months) | 24.32 |
Needless to say, earning close to a 50% return on investment over the space of five years from dividends alone is quite impressive. But the question now becomes, can BP shares do it again?
Long-term dividend forecast
Management’s made its commitment to shareholder payouts fairly clear, specifically highlighting dividends and share buybacks as a key focus of its capital allocation strategy. As part of its strategic pivot, the firm’s already in the process of disposing of underperforming assets to raise capital and reduce its debts. And is simultaneously targeting up to $5bn in annualised savings by 2027.
Overall, the impact of these moves suggests a 20% annual growth rate in free cash flow over the next two years. And with that in mind, it’s not surprising that the long-term dividend forecasts from analysts suggest that BP shares will continue to be a lucrative source of passive income over the coming years.
| Year | Dividend Per Share Forecast (¢) |
| 2025 (Q4) | 8.32 |
| 2026 | 34.94 |
| 2027 | 37.66 |
| 2028 | 40.56 |
| 2029 | 43.70 |
If the projections are correct, a £1,000 investment today (which fetches around 230 shares after its impressive bull run) could go on to generate a total passive income of $379.91 (£286.53 at the current exchange rate). While not as impressive as the last five years, it’s nonetheless still a meaningful sum.
Risk versus reward
While the dividend forecast for BP shares looks encouraging, it’s important to remember that projections are never set in stone. For several years, BP’s aggressive push into renewables resulted in the company falling behind its key competitors. Management’s since rectified this issue with the previously mentioned strategic pivot.
However, this return to fossil fuels still entails execution risk. And even if management’s revamped strategic is pulled off flawlessly, it nonetheless increases the group’s exposure to fluctuating oil & gas prices.
Suppose commodity prices suffer on the back of global economic weakness, or OPEC+ production is ramped up? In that case, BP’s profits could take a considerable hit, impacting dividends at the same time.
The bottom line
BP’s operational performance has notably improved. And given the stock still trades at a fairly modest forward price-to-earnings ratio of 12.3, the valuation today doesn’t seem too demanding either.
However, with uncertainty about the firm’s ability to transition to renewable energy in the future, this discount isn’t entirely surprising. That’s why, personally, I think there are far better income opportunities to explore elsewhere within the energy sector.
