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Dividend investing: Should you buy oil stocks like BP if another FTSE market crash comes?

For many market participants, it feels good to see shares, including oil stocks, going in a positive direction. Oil prices have moved far beyond the negative prices that we have saw a few months ago. The price of Brent crude, the internationally accepted benchmark, is now around $41. And this recent move up in oil prices has brought the decimated oil sector up with it.

What might be next for oil major BP (LSE: BP) shares, especially if there is yet another FTSE market crash this year?

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Is another FTSE market crash coming?

Since late March, the FTSE 100 index is up over 25%. Put another way, if you were brave enough to invest £1,000 in the index in early April, you’d now have over £1,250.

Understandably market participants are nervous about what may happen to their portfolios if the FTSE crashes again in the coming months. After all, in early 2020, Britons witnessed one of the steepest market drops in recent history.

So far in the year, we’ve seen a bear market, the Covid-19 pandemic, an oil price war, record-low interest rates, and even a bull market. If history is any guide, extreme declines and spikes in shares are likely to happen in the future too. However, investors may do due diligence on a wide range of stocks to see which ones may be more appropriate for their portfolios.

Fortunately, Foolish investors don’t need to worry about short-term volatility. We know how important it is to buy solid companies and hold for the long term. 

Are oil stocks like BP cheap enough to buy now?

Year-to-date, the BP share price is down about 33% and hovering at 320p. Yet that metric tells only half the story. Since the lows seen in March, BP shares are up over 35%. Hence if you were brave enough to invest £1,000 in the company then, you’d now have over £1,350.

According to a recent trading update, management now expectson-cash impairment charges and write-offs in the second quarter, estimated to be in an aggregate range of $13 billion to $17.5 billion post-tax“. This is a big write-down. In fact it is the biggest write-off since the Macondo oil spill of 2010.

I believe it would be important to see the next quarterly results before making a long-term investment case in BP stock. The decrease in global energy demand will likely hurt the company’s upstream and downstream business further in Q2.

Is BP’s dividend safe?

Over the years, dividend-paying shares, like BP stock, have been darlings especially among passive income seeking investors. BP is still paying a quarterly dividend and thanks to the sagging stock price, the current yield is 10.6%. 

Yet, how long can this dividend yield last when so many other companies have been cutting theirs? Indeed, the trading update of mid-June may be taken as a potential warning that the drop in profitability may hurt the dividends.

If the company were also to decrease the dividend, the BP stock price would likely come under pressure. I’m too of the camp that a dividend cut is a matter of ‘when not if’ and I expect the announcement to be made with the Q2 results.

Long-term market participants may want to consider buying BP stock around 300p.

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tezcang has no position in any of the shares 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.