BP’s (LSE:BP.) shares are currently (as I write on 29 November) offering a dividend yield of 5.5%, the 10th-highest on the FTSE 100. This is based on amounts declared over the past 12 months of 32.64 cents (24.69p at current exchange rates).
Although the group’s payout was cut in early 2020, it’s been steadily increasing over the past few years. Its third quarter dividend for 2025 is 58.5% higher than for the same period in 2020. And if the analysts are right, this will continue to rise. By 2027, they’re expecting a full-year dividend that’s 13.3% higher than the one forecast for 2025.
But a stock’s yield is based on its share price as well as its payout. This means it could fall even if its dividend is rising (and vice versa).
A crystal ball
However, forecasting BP’s share price is nigh on impossible because its earnings are largely determined by the – notoriously unpredictable — price of oil. But there are plenty of organisations that do produce oil price forecasts. Here are just two examples.
The US Energy Information Administration’s expecting inventories to continue to rise in 2026. They predict the average price for a barrel of Brent crude to be $55 next year. For context, it’s currently $62. JP Morgan’s forecasting $58. The investment bank also expects supply to exceed demand.
On this basis, we’re unlikely to see BP’s earnings return to their levels of three years ago, when the oil price peaked at over $110. In fact, these forecasts suggest a fall in profit – and therefore the group’s share price — is a distinct possibility.
On the up
In these circumstances – assuming the dividend increases as expected – the stock’s yield will climb higher. For example, if BP meets analysts’ expectations and pays a dividend of 25.4p in 2026, but its share price falls 10%, its yield would increase to 6.3%.
I was fortunate enough to buy the stock when it was 18% cheaper. This means my yield’s currently around 6.7%. Although I was aware that BP’s earnings are likely to be volatile, I could see that it was less efficient than some of its rivals.
And I was encouraged by some of the group’s larger shareholders urging its management team to make some changes to its cost base with a view to increasing its free cash flow. My thinking was that if the energy giant can do this, then its share price is likely to do better relative to that of its peers.
Pros and cons
But I’m aware of the risks. Aside from earnings volatility, I know it’s a dangerous industry. The group’s still paying compensation and fines following the Deepwater Horizon tragedy of 2010. And the stock’s unlikely to appeal to ethical investors meaning there’s a smaller pool of potential buyers out there.
However, due to BP’s impressive cash flow, its dividend looks secure for now. Of course, there can be no guarantees but it’s the same for any stock. But if it can also improve its efficiency, there could be some capital growth too. Therefore, I think it’s one to consider.
The oil and gas group’s just one company offering a healthy dividend right now. It could be a good time for income investors to put some of their spare cash into high-yielding UK stocks.
