The FTSE 100’s home to plenty of high-yielding passive income stocks. Among these is BP (LSE:BP.), which has been a member of the index since its launch in January 1984. Today (16 January), the energy giant’s paying 5.6% in dividends.
That’s nearly twice as much as the Footsie itself.
Does this mean it’s a screaming buy? Let’s take a closer look.
Steady progress
As a result of the pandemic, BP cut its quarterly dividend in August 2020 by 50%. Having maintained it at this reduced level for a year, it then started steadily increasing it again. In cash terms, it’s now 21% lower than before the cut.
If its current payout’s maintained, an investor would need 24,630 shares to earn £500 a month in dividends, at current exchange rates. At today’s share price of 435p, this would cost £107,141.
That’s a lot of money to find in one go. However, there’s no need to give up. I reckon it’s possible to get there over time. And in my opinion, buying dividend shares is the best way of generating a healthy second income over the long term.
Let’s use BP as an example.
A few numbers
If someone bought 230 shares costing £1,000, they would receive a dividends of £56.03 in year one. But instead of using this cash to pay for a fill of petrol at one of the group’s forecourts, I believe it’s better to use it to buy more shares. Based on today’s price, this would result in another 12 shares being added to the pot.
In year two, £58.95 would be generated in dividends. And so on. Repeat this process for 25 years and the initial £1,000 could grow to just under £4,000.
Of course, this is a long way short of the £107,141 mentioned earlier. But growing an initial investment three times without having to do anything illustrates why so many people are attracted to the idea of passive income.
Returning to my example, adding another £1,000 each year would result in a final sum of £54,776. Invest £1,956 a year for 25 years, and it would be possible to get to our target.
It’s important to remember that dividends are never guaranteed. BP’s cut in 2020 is a valuable reminder of this. And my example assumes that the share price doesn’t change. However, I think there are a number of reasons why the energy giant’s well placed to continue growing its dividend.
Pros and cons
Despite the transition to cleaner energy, demand for oil and gas is continuing to rise. The group’s investing heavily to increase its production and in August, made its largest discovery of oil for 25 years, in Brazil.
Admittedly, the sector doesn’t appeal to everyone. As well as ethical considerations, the industry’s operationally challenging. Also, earnings can be volatile, with energy prices impossible to predict accurately.
But BP’s working hard to cut costs, dispose of non-core businesses and reduce its debt. This should help improve its balance sheet as well as raise its free cash flow and earnings.
On balance, that’s why I believe BP’s worth considering by those looking to boost their passive income. But only as part of a well-diversified portfolio shares. Fortunately, there’s plenty to choose from.
