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Direct Line’s dividend is back! I’d split £2k between this FTSE 100 stock and the BP share price

As the Covid-19 pandemic drags on, my favourite type of FTSE 100 stock is one that shows it can weather the storm.

I was therefore delighted by yesterday’s news that Direct Line Insurance Group (LSE: DLG) was restoring its dividend. It is a reminder that shareholders can still generate the income they need by investing in top UK income stocks.

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The car insurer didn’t just declare an interim 2020 dividend of 7.4p, it increased the payout from last year’s 7.2p. CEO Penny James also declared a special dividend of 14.4p as a “catch-up of our cancelled 2019 final dividend”. I like to see companies looking after shareholders like that.

Top FTSE 100 income stock

The move reflects the board’s continued confidence in Direct Line’s capital position and earnings, as it now has a clearer idea of the impact of travel and business interruption on claims. It also benefited from a massive 70% drop in motor insurance claims during the lockdown.

Direct Line has got through the first phase of the pandemic without accessing Government support, or laying off staff. This financial resilience makes it a tempting FTSE 100 stock to pop into your portfolio, and others agree. Yesterday, the Direct Line share price rose 5.33%, today it’s up another 3%. It remains below its pre-crisis peak, trading at around 11 times earnings. So it isn’t too expensive.

Direct Line has taken a hit from coronavirus, with first-quarter losses of £25m on travel insurance, and £10m for business insurance. First-half pre-tax profits fell 9.5% to £236.4m, mostly due to by £30.4m of bad weather costs and £15m for one-off restructuring.

If you are looking to invest £2k or any other sum, I’d consider the Direct Line share price and another FTSE 100 stock that was causing a stir yesterday.

BP remains a dividend income hero

The BP (LSE: BP) share price actually jumped around 7% after the oil giant announced that it was halving its dividend. Normally, you would expect a FTSE 100 stock to crash when delivering news like that.

Instead, it came across as good news. First, investors were braced for bad news, and were relieved to get it out of the way. Second, it still leaves BP yielding around 5.4%. Third, the board aims to maintain the dividend at this level going forwards, returning any additional surplus cash via share buybacks.

Finally, it should help preserve cash after making a $6.7bn loss in the second quarter due to the falling oil price, and help fund the company’s shift into green energy.

The FTSE 100 stock is up another 4.5% today, as investors absorb the news. The BP share price is still down 40% on its January high, making now a tempting entry point. Its future looks more sustainable in a number of ways.

It is ironic that the Direct Line dividend increase makes this FTSE 100 stock look like a top income buy, because BP’s dividend cut has had the same effect. If I had £2k to invest, I would consider splitting my money between them, to provide diversification inside a Stocks and Shares ISA.

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Harvey Jones 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.

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