BP (LSE: BP) shares are not just about oil and gas prices. For passive income investors, the shares’ high projected dividend yield could be the hidden engine for major long-term returns.
These could make life a lot better in the short term and create a much more comfortable retirement.
So, what makes the shares stand out from the crowd of many other dividend stocks?
Strong earnings growth potential
Earnings growth is the key driver for rises in any firm’s dividends and share price. And BP took a huge step towards improving these when it announced a strategic reset in February.
This involved refocusing more on fossil fuels and less on renewable energy. It followed long-running criticism from investors who thought its previous stance had damaged its profits outlook compared to fossil-fuel-focused peers.
A risk for the firm is any backsliding on this reset for any reason – activist or government pressure, perhaps.
However, its 4 November Q3 2025 results showed profit attributable to shareholders soar 464% year on year to $1.16bn (£0.88bn).
Operating cash flow leapt 15% to $7.79bn, while adjusted earnings before interest, taxes, depreciation, and amortisation edged up 3%.
The firm also boosted shareholder rewards by increasing the interim dividend by 4% to 8.32 cents. And it announced a $750m share buyback, which tends to support share price gains.
Following these strong numbers, analysts forecast BP’s earnings will grow a standout 25.3% a year to end-2027.
Share price gains in view?
Buybacks can gain even more traction in price terms if a stock is undervalued in the first place, of course. And looking at BP, this appears to be the case.
Compared to its peers on the key price-to-sales ratio, it is bottom of the group at just 0.5 against an average of 1.9. These firms comprise Shell at 0.8, ExxonMobil at 1.5, Chevron at 1.6, and Saudi Aramco at 3.6.
It also looks very undervalued on its 1.6 price-to-book ratio compared to its peers’ average of 2.2.
On my litmus test of value – the discounted cash flow model – BP shares are 56% undervalued at their current £4.54 price.
So their ‘fair value’ is £10.32.
It is my litmus test because it pinpoints where any stock should trade, based on cash flow forecasts for the underlying business. These, in turn, factor in earnings growth.
How much passive income can it make me?
BP’s current dividend yield is 5.3%. This compares well to the present FTSE 100 average of 3.1%.
But it is set to get even better, according to analysts’ projections. These are for dividends of 25.2p this year, 26p next year, and 27.2p in 2027.
These would generate respective yields of 5.5%, 5.7%, and 6%.
That said, dividend yields can change up or down and even be cancelled.
Investors considering BP could buy 4,405 shares with £20,000. Based on its 6% forecast yield, these would generate £16,388 in dividends after 10 years. This includes the use of dividend compounding.
After 30 years on the same basis, this would rise to £100,452. Including the £20,000 initial investment, the total value of the shares would be £120,452.
That would generate an annual dividend income of £7,227 by then!
Given its strong earnings, extreme undervaluation, and rising dividend yield, I will buy more of the shares myself very soon.
