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Should you buy shares in oil giant BP for its 6% yield? This is what I’d do

With the BP (LSE: BP) share price at 485p, the forward-looking dividend yield is about 6.4% for 2020. Such a juicy payment must be worth considering for a portfolio focused on income, right?

But for me, there’s a problem. My ideal dividend investment will sport a shareholder payment that rises a little each year. And behind that, there will be a generally rising record of revenue, earnings and cash flow.

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I don’t want dividend payments to stall or be interrupted because of weaknesses in the basic financial performance of an underlying business. And truth be told, I hanker after modest capital growth from a gradually rising share price too.

When it all comes together like that, I can sleep easily while holding my dividend-led investments. And I’m happy to nod off for a decade or two without checking share prices while the stock market ‘magic’ happens and my wealth grows.

BP fails my basic tests

In my eyes, BP fails those tests. For example, the dividend has been essentially flat since 2014. And revenue, earnings and cash flow have been all over the place. None of those measures are rising like I want them to, and that reflects in the share price chart.

It’s true that sometimes the shares shoot up and occasionally they plunge. But if you look at the chart back to around the turn of the century (2000), the movement has been predominantly sideways – market action that matches the firm’s financial performance. That’s not what I want at all for any of my investments.

Much of the volatility along the way arises because the price of oil affects the business, which is beyond the directors’ control. Cyclicality is a big characteristic of the underlying business. But I also reckon a larger theme is worth considering when appraising the share for your portfolio – economies of the world are planning to rapidly move away from their reliance on hydrocarbon fuels and products.

Reshaping the business

It’s true that BP has been divesting once-important operations and reshaping itself to change with the times. Divestment announcements in 2019 reached $7.2bn by the third quarter, including the firm’s Alaska operations. And the company is throwing itself into new joint ventures in fuels marketing in India and in electric vehicle charging in China.

Maybe BP will emerge from this period of extended change as a leaner organisation with greater prospects for growth. The dividend could even start to go up again. But in the meantime, the company still relies on its traditional oil-based operations, which I reckon carry great risk.

For example, the firm is still paying costs relating to 2010’s oil blowout disaster in the Gulf of Mexico, which seem to be running at between $2bn and $3bn a year almost 10 years after the event. We can’t discount the possibility of something similar happening again.

I know a lot of pension funds and the like hold BP in their diversified portfolios, but I think, as private investors, we can do better than this one. So I’m avoiding the shares.

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Kevin Godbold has no position in any share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.