Which is the best dividend stock: BP plc, United Utilities plc or Chensara plc?

BP plc (LON:BP), United Utilities plc (LON:UU) or Chensara plc (LON:CSN): how safe are the dividends for these high yielding shares?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Today, I’m taking a look at which of these dividend stocks are worth buying.

Uncertainty

With a dividend yield of 7.6%, BP (LSE: BP) is a very tempting dividend stock. Unfortunately, its dividend doesn’t look very sustainable. Earnings and free cash flow have collapsed in the wake of lower oil prices and the company is relying on debt and asset sales to fund shareholder payouts. And although oil prices have recovered substantially from its mid-February lows, BP’s earnings are not bouncing back any time soon.

The downstream business, which cushions profits when oil prices are low, is facing some serious headwinds. Analysts expect a significantly weaker refining environment this year as global product inventories are near record highs and demand for refined products have not picked up as strongly as expected. Already, downstream profits have fallen by nearly a quarter in the first quarter of 2016.

Passive income stocks: our picks

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

With earnings facing pressure on both fronts, BP would struggle to generate enough cash flow to fund ongoing capital spending and shareholder payouts. Indeed, dividend futures for the stock are pricing a 38% cut in its dividend for 2017; that indicates a very high level of uncertainty for its dividend sustainability.

Relatively attractive

For investors looking for a reliable dividend, United Utilities (LSE: UU) would be a great pick. Water utilities are natural monopolies, and steady demand for water means revenues and cash flows for the utility company are almost invariable and highly predictable.

City analysts currently forecast that United Utilities’ underlying EPS will grow by 4% this year, with dividends set to increase by 1%. This would imply its shares trade at a forward P/E of 18.0, with a prospective dividend yield of 4.1%.

While those aren’t eye-popping numbers, they are typical for ultra-safe investments. What’s more, United Utilities is attractive relative to its closest peer, Severn Trent. By comparison, Severn Trent trades at 21.5 times expected 2016 earnings and has a prospective yield of just 3.7%.

Great value

Closed-book insurance consolidator Chesnara (LSE: CSN) offers great value, as its shares currently trade at 0.86 times its embedded value – that’s the present value of future profits from existing policies plus its adjusted net asset value. It’s a conservative measure of the insurer’s value, as it assumes Chesnara makes does not gain any new business.

Acquisitions enable the company to grow more quickly and often at lower cost than they could be built in-house. Although Chesnara’s acquisition strategy means that it would always need to make new purchases in order to grow, there remains plenty of opportunities because the life and pensions market is highly fragmented in the UK and the rest of Europe. Further consolidation makes sense because scale enables insurers to realise substantial cost savings, which in turn delivers greater returns to their stakeholders.

Chesnara’s strong cash flows means its stock has an impressive 6.2% dividend yield. Its dividend looks secure too; dividend cover in 2015 exceeded 1.7 times and net cash flow generation covered shareholder payments by more than three times.

Overall, I believe Chesnara to be the best dividend stock out of the three. It has the best of both worlds: a high yield and a sustainable dividend outlook.

This AI stock is attracting investors like Michael Bloomberg and Peter Thiel…

Why are these legendary investors, already wealthy beyond imagination, drawn to this opportunity? The allure lies in more than just potential returns; it's a vote of confidence in a company poised for long-term success.

Imagine a revolutionary AI company that's not just participating in the digital media landscape but reshaping it entirely.

Trusted by giants like Amazon, Disney, and Netflix, the company reported nearly £637 million in revenue last year, marking a robust 7.8% growth over three years. Its impressive market reach and spirit of innovation are just the beginning of its story.

Best of all, we’re thrilled to offer you an exclusive glimpse into this game-changing AI investment, absolutely free.

Get your free AI stock pick

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Jack Tang has no position in any shares mentioned. The Motley Fool UK has recommended BP. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Electric cars charging in station
Investing Articles

Looking at Tesla stock? Consider this Warren Buffett-held EV rival instead

Tesla stock is one of the most popular investments in the UK right now. However, Edward Sheldon sees more appeal…

Read more »

Investing Articles

Up 18% in the past week, I think this FTSE 100 share could keep soaring!

While the FTSE 100's up 5.6% in the past week, this blue-chip share's risen much more sharply. Can it move…

Read more »

Concept of two young professional men looking at a screen in a technological data centre
Investing Articles

2 top growth stocks to consider buying for the next phase of the AI revolution

The artificial intelligence (AI) revolution is advancing rapidly on the application side, setting up these two growth stocks for more…

Read more »

Growth Shares

Will the Lloyds share price be a winner or loser from the tariffs turmoil?

Jon Smith explains both sides of the argument when trying to figure out if the Lloyds share price will move…

Read more »

Investing For Beginners

Aston Martin: is there a real risk the FTSE company goes bust?

Jon Smith notes the struggles over the past few years of an iconic car brand, but explains why his head…

Read more »

Growth Shares

2 crackerjack growth shares to consider buying as the dust settles

Jon Smith talks through a couple of growth shares that he feels represent good value for investors right now as…

Read more »

Mindful young woman breathing out with closed eyes, calming down in stressful situation, working on computer in modern kitchen.
Investing Articles

I’ve been investing in the stock market for 25 years. Here are 4 tips to navigate the current volatility

Investing during periods of extreme stock market volatility isn’t easy. Here, Edward Sheldon provides his top tips to get through…

Read more »

Investing Articles

£10,000 invested in Tesla shares a fortnight ago is now worth…

Despite extreme volatility, the value of a £10,000 investment in Tesla shares from a fortnight ago hasn’t changed much. That’s…

Read more »