BP plc’s Dividends Are Rising Fast

bpDividends at BP (LSE: BP) (NYSE: BP.US) took a big hit after the Gulf of Mexico disaster, but they’ve recovered pretty well. The annual cash handout might not be back up to pre-catastrophe levels, but shareholders enjoyed a yield of 4.5% last year, based on the year-end share price.

In fact, here’s what the dividend situation looks like, including two years of forecasts:

Year Dividend Yield Cover Rise
2010 21c 2.7% n/a(1) -62.5%(2)
2011 29c 3.8% 4.68x +38.1%
2012 34c 4.8% 1.70x +17.2%
2013 37c 4.5% 3.35x  +8.8%
39c 5.0% 2.04x  +5.4%
41c 5.3% 2.08x  +5.1%

* Forecast
(1) EPS was negative
(2) Dividend cut in disaster year

Those wanting income today from their investments should do well with BP — cash returns of better than 5% on today’s price of 468p are amongst the best in the FTSE 100.

Further ahead

But for those with a longer-term outlook who are building a portfolio with a view to earning a healthy income stream in another decade or more, today’s yield should surely take a back seat. It is the rate of rise of the dividend that counts, and a company offering a lower yield today but lifting its dividend by more than inflation will come out ahead of an initially higher yielder that is not rising so strongly.

The annual rise at BP is slowing, as we get back to a sustainable yield. But rises look set to continue above inflation for some time to come, and that cover by earnings of more than two times provides us with some confidence in the forecasts.

Back to the crash

Let’s look back at that fateful year of 2010. When the extent of the Deepwater Horizon explosion and subsequent oil spill became known, BP shares plummeted — it was a pariah stock that nobody wanted to hold.

oil rigBut if you’d bought near the lowest point very shortly after the crash, you could have had the shares for around 305p each.

The 2010 dividend yielded just 2.7% on the year-end share price, but on that 305p you’d have had more like 4.3%.

Not bad.

You’d have enjoyed an effective 5.9% the following year, been toasting a 6.9% yield in 2012, and you’d have been positively squealing with delight at the 7.1% you’d have pocketed in 2013.

Future yield

And how about another 7.7% this year, followed by 8.1% in 2015?

The moral of the story is simple — if you see a company with a policy of paying good dividends having to slash its payouts due to a one-off disaster, that’s the time to buy for future income.

Finally, if you're looking for rising dividends for your income portfolio, you should have a read of "The Fool's Five Shares To Retire On" report. They're all top FTSE companies, and between them they provide a nicely balanced selection.

The report is completely free, so click here to get your copy today!

Alan Oscroft has no position in any shares mentioned. The Motley Fool has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.