I FTSE 100 it is home to many amazing stocks that pay generous levels of passive income. Another thing that stands out to me BP (LSE:BP.), with a return of around 5.3%. This is more than double the index and more than can be earned from a high-interest savings account.
It means someone with £500 to spare could get £26.50 in dividends. Does this make it a ‘must have’ for income investors? Let’s see.
Cash is king
Although dividends are distributions of profits, they are paid in cash. And as any accountant will tell you, income can be much different than real money. BP is a good example of this.
The oil giant recently reported a replacement cost (RC) profit of $1.1bn by 2025. Operating cash flow (OCF) was $24.5bn.
The main difference between these two numbers is explained by the movement of working capital that affects cash, and the exclusion from RC profit of the impact of changes in energy prices in the group’s trees. Not surprisingly, the price of oil has a significant impact on performance.
For the mathematically minded, there was a 96% (near perfect) correlation between the Brent crude oil standstill price and BP’s cash flow from 2018-2025.
| A year | Brent crude ($ per barrel) | Net income from operating activities ($bn) |
|---|---|---|
| 2018 | 71.34 | 22.9 |
| 2019 | 64.30 | 25.8 |
| 2020 | 41.96 | 12.2 |
| 2021 | 70.86 | 23.6 |
| 2022 | 100.30 | 40.9 |
| 2023 | 82.49 | 32.0 |
| 2024 | 80.52 | 27.3 |
| 2025 | 69.14 | 24.5 |
In 2020, at the height of the pandemic, BP’s OCF was $12.2bn. To help conserve cash, it cut its dividend by 50%. This is an important reminder that nothing should be taken for granted when it comes to payroll, especially in a company that faces a large number of operational challenges every day.
In turning
However, since 2020, the group’s division has been slowly increasing.
By 2025, 32.96 cents (24.2p at current rates) has been announced. Its last quarterly payout is 79% of what it was before the 2020 cut. With a current (13 Feburary) yield of 5.3%, it makes BP the eleventh largest dividend payer on the FTSE 100.
In context, the group has paid out $5.1bn in dividends by 2025. This suggests that there is plenty of headroom.
And as a reminder of how reinvestment gains can work, someone buying £500 of shares today could grow this to £1,818 (a 263% return) over 25 years, assuming the group can maintain its current yield.
A new strategy
In a change of direction, the group has decided to stop buying back its shares. Instead, it will use its remaining funds to “speed up reinforcement” its balance sheet and taking advantage of the “a unique deep hopper for oil and gas opportunities“.
Indeed, this group has been working hard to reduce its debts. It fell by 2% through 2025, but is expected to fall further in the coming months as the group continues to shed some of its non-core assets.
BP have been struggling to find their identity recently but the way forward seems clear. It will focus on its hydrocarbons business. When Meg O’Neill, the club’s new boss, takes over in April, I suspect she’ll be happy that a lot of the heavy lifting has already begun. All the group’s recent actions – improving cash flow and reducing its costs and borrowing – have, in my view, made BP’s dividend more secure than ever. That’s why I think it’s an excellent income stock to consider.
