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Why I like BP’s double-digit dividend yield despite the stock market crash and negative oil prices

It’s been a roller-coaster ride for the world in 2020’s first quarter. Covid-19’s spectre might have first shown up in China, but it was soon looming over the world. As the pandemic’s human toll grew and lockdowns started, economic activity came to a standstill and stock markets plummeted. Recent data prints are so bad, they’re hard to swallow. One of these is oil prices that has affected companies like BP (LSE: BP) .

Despite all the gloom and doom, the FTSE 100 oil biggie maintained its dividend payout, announced when it released its quarterly financials yesterday.

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BP defies the trend

When I last wrote about BP, the dividend update is exactly what I was waiting for.  Yet, when announced, it surprised me for three reasons. One, it deflected from the broader trend seen across FTSE 100 companies, which has seen dividends cut drastically. Two, the oil price weakness seen recently is unprecedented. With demand as reduced as it is, oil companies are prepared for more disruption going forward. 

Three, BP’s own result was disappointing. It reported an overall loss and also a replacement cost loss, which is the total loss less gains or losses from holding inventories. It has reported a small underlying replacement cost gain. But it’s outlook is far from confident. In the release, it said: “BP’s future financial performance will be impacted by the extent and duration of the current market conditions and the effectiveness of the actions that it and others take. It is difficult to predict when current supply and demand imbalances will be resolved and what the ultimate impact of Civid-19 will be.” 

Sustaining dividends

Maintaining dividends in this environment, when share prices have fallen sharply, BP’s suddenly looking quite attractive for investors interested in generating passive income. Its dividend yield is at 10.4% as I write and if BP’s share price broadly continues to fall, it will look even better over time. But that’s assuming that BP will indeed continue to pay dividends. So will it?

I looked at BP’s dividend history for the last 20 years and it turns out that there isn’t a single year when it hasn’t paid dividends. This should be reassuring for investors. However, it has cut the total amount of dividend paid. I reckon that that’s a possibility we could be looking at later in the year. Even with a cut to dividends, the returns to investors, or the dividend yield, could be quite high compared to other FTSE 100 companies’ yields.   

What I’d do next

While deciding whether to invest in BP or not, I’d keep a keen eye out for oil prices. If they stabilise, that’s a positive. But if I want to really be sure that my investments will give returns, I’d wait for the next dividend announcement. It’s unlikely that BP’s share price will rise in a hurry in any case.

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Manika Premsingh owns shares of BP. 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.