Generating a passive income from shares is one of the most powerful reasons to invest. There’s one red-hot FTSE 100 stock offering an income stream that is hard to ignore.
An investor with £52,440 in the shares today could be banking approximately £2,484 a year in dividends, without lifting a finger.
That is a serious income from a single stock. But which Footsie giant is it, and is the payout actually built to last?
How does the maths stack up?
As I write on Friday afternoon (12 June), BP (LSE: BP) shares are trading at 524.4p, meaning £52,440 would buy 10,000 of them. Here’s how the income calculation works:
| Investment | £52,440 at 524.4p |
| Shares purchased | 10,000 |
| Quarterly dividend per share | 6.21p |
| Annual dividend per share | 24.84p |
| Dividend yield | 4.73% |
| Annual passive income | £2,484 |
Of course, most investors will not have £52,440 to deploy in one go. But it just goes to show how picking the right stocks can make a huge difference. Of course, this doesn’t account for the recent share price growth, with the stock up 40% in the last year alone.
So, what’s really driving this energy giant’s shares higher, and is it still one for investors to consider buying?
Is the dividend built to last?
The company’s shares are up around 20% year to date, as elevated oil prices have fed directly into revenues and margins. As an integrated producer, the company benefits when crude oil is high and the Middle East conflict has kept oil supply expectations in check.
The dividend yield of 4.7% is well above the Footsie average, so I think it does tick a lot of boxes for passive income investors. But I think it’s always worth thinking beyond just the headline numbers that can capture our attention.
One of the challenges is how cyclical energy stocks can be. Their earnings are heavily tied to the overall health of the economy which drives energy demand.
Building a steady passive income usually relies on diversifying across stocks, and I wouldn’t want to be relying on a single, cyclical stock like BP for my income over many years.
The price-to-earnings (P/E) ratio of 35 also means it doesn’t come cheap. In such a volatile geopolitical and economic environment, I won’t personally be buying in at the current price.
My verdict
For income-focused investors, it’s clear that the company could have something compelling to offer. The world is an uncertain place and elevated energy prices clearly offer something of a defensive position for that.
However, despite the handsome yield, I think the cyclicality and lofty P/E ratio mean there are other more affordable options available on the market that I’ll be investigating instead.
Should you invest £5,000 in Bp P.l.c. right now?
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Ken Hall does not hold any positions in the companies mentioned.
