Im always on the lookout for big FTSE 100 companies when theyre being offered in the market at an attractive valuation for dividend investors. A little higher yield at the time you buy can make a big difference to the growth of your income stream over the long term.
Yield at post-oil-spill high
Just over a year ago, I made Royal Dutch Shell an income buy of the week. At that time, Shell was trading at 2,130p and offered a forecast yield of 5.5%. Today, the price is 2,330p and the yield has come down to 5.2%.
While Shells shares have risen almost 10% over the period, BPs shares are currently trading at the same 440p level as back then. And with BPs dividends having increased at a higher rate than Shells in the meantime, a trend City analysts reckon will continue in 2015, BPs forecast yield has moved well ahead of its rivals.
BPs prospective income of 5.8% is also as high as its been since before the Gulf of Mexico oil spill of April 2010.
Confidence in BPs future had gradually improved as the market gained more insight into the sanctions and financial penalties the company faced as a result of the oil spill. While the sorry story is still to fully play out, BPs shares reached a post-spill high of 524p this summer.
The 16% slump in the shares since then coincides with a hefty fall in the price of oil and rising tensions in the Ukraine. The oil price and western economic sanctions against Russia where BP has a 20% stake in state-controlled Rosneft have dampened investor demand for BPs shares.
A great opportunity right now
You dont get a 5.8% yield (against a market average 3.5%) without a heightened level of uncertainty and risk. Of course, sometimes an inflated yield can be a precursor to a future dividend cut. Often, though, the uncertainties pass and income investors who bit the bullet when sentiment was low are handsomely rewarded with bumper dividends, and good capital appreciation into the bargain.
If youre an equity income investor looking for a yield higher than that of the market, you have to be a contrarian to some degree. While BP wouldnt be my first pick for a dividend share, it looks a great opportunity right now for an investor with a diverse portfolio, who is prepared to take a little more risk for the potential reward of a turbo-boost to the future income stream.
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G A Chester has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.