While a cash ISA offers relatively low levels of risk, a return of around 1.5% continues to be disappointing. It’s below the current level of inflation and is likely to lead to a loss of spending power over the long term.
In contrast, FTSE 100-member BP (LSE: BP) has a dividend yield of 6%. Although it comes with significantly greater risk than a cash ISA, its share price appears to offer a margin of safety. As such, it could be more appealing from a risk/reward perspective.
Alongside another dividend growth share which reported results on Wednesday, it could be worth buying for the long term, in my opinion.
Improving prospects
The stock in question is residential landlord Grainger (LSE: GRI). Its trading update showed it’s made a strong start to the financial year. It’s achieved 3.4% like-for-like growth on its Private Rental Sector portfolio in the first four months of the year. This suggests that customer demand remains high, and the company has a quality offering.
Grainger has made progress on its largest private rental sector scheme outside of London, with lettings progress at Clippers Quay in Salford ahead of schedule. It remains optimistic about its future prospects, and remains in a strong position to progress to its next phase of growth, according to its update.
With the business having raised dividends per share at an annualised rate of 20% in the last four years, it has a strong track record of income growth. Although it has a dividend yield of just 2.6% at present, it could become an increasingly appealing income share over the medium term.
Growth potential
As mentioned, BP’s dividend yield of around 6% is relatively appealing. The company’s recent update suggested its main divisions are performing well, while major investment in the last couple of years could provide the business with a growth catalyst over the medium term. This could help to boost divided payments, expected to be covered 1.5 times by profit in the current year. This suggests there’s sufficient headroom to raise shareholder payouts – especially since the company’s bottom line is forecast to increase by 11% this year.
Of course, BP’s financial outlook is highly dependent on operating conditions within the oil and gas sector. The volatility of the oil price means that the stock is likely to remain risky relative to other FTSE 100 shares, and especially when compared to a cash ISA. However, the income return potential on offer, as well as a price-to-earnings (P/E) ratio of around 12, suggests there’s a margin of safety. This could mean the risk/reward opportunity is favourable over a long-term period.
As such, for those who are able to invest over a multi-year timeframe, BP’s shares could hold greater appeal than a cash ISA. They may be riskier, but the return potential on offer appears to be significantly higher.
