Investors seeking passive income may find opportunities in high-yield stocks within the FTSE 100, particularly with BP (LSE:BP). As of January 16, 2024, the energy company offers a dividend yield of 5.6%, nearly double that of the index itself. This prompts the question: how many shares of BP does one need to purchase to generate £500 per month in passive income?
Understanding BP’s Dividend History
BP’s dividend history reflects significant fluctuations influenced by market conditions. During the pandemic, the company reduced its quarterly dividend by 50% in August 2020, maintaining this lowered rate for a year. Although BP has since resumed increasing its dividends, the current payout is still 21% lower than pre-pandemic levels. To achieve a monthly income of £500 from dividends at the current payout rate, an investor would need approximately 24,630 shares. Based on BP’s current share price of 435 pence, this translates to an investment of around £107,141.
While this is a substantial amount to invest upfront, it is feasible to reach this target over time by strategically purchasing shares.
Building Passive Income Through Reinvestment
Consider the scenario of an investor who buys 230 shares for approximately £1,000. In the first year, this investment would yield around £56.03 in dividends. Instead of cashing out, reinvesting these dividends to purchase additional shares could significantly enhance future returns. For instance, reinvesting the first year’s dividends could acquire an additional 12 shares.
Continuing this strategy for just over 25 years could multiply the initial investment nearly fourfold, growing to just under £4,000. Although this falls short of the previously mentioned target, it illustrates the long-term potential of dividend reinvestment for generating passive income.
Moreover, if the investor contributes an additional £1,000 annually, the total investment could rise to approximately £54,776 after 25 years. To reach the target of £500 monthly, an annual investment of around £1,956 could suffice.
Risks and Considerations
It is crucial to acknowledge that dividends are not guaranteed. BP’s past dividend cut serves as a reminder of the uncertainties surrounding dividend payouts. Additionally, this analysis assumes stable share prices, which can fluctuate due to market conditions.
Despite the ongoing transition towards cleaner energy, demand for oil and gas remains strong, with BP investing significantly in expanding production capabilities. In August 2023, BP announced its largest oil discovery in Brazil in the past 25 years. While the sector faces ethical scrutiny and operational challenges, BP is actively working to reduce costs and streamline its operations, which could improve its financial stability and free cash flow.
In conclusion, while BP offers a compelling opportunity for passive income through dividends, potential investors should consider including BP shares as part of a well-diversified portfolio. The company’s historical performance and current strategies provide a basis for optimism, but prudent investors should remain aware of the inherent risks involved in the energy sector.
