It seemed like dividend stocks were back in demand last week. Two of the top three most popular buys at UK investment platform Hargreaves Lansdown were big oilers BP (LSE: BP) and Shell (LSE: SHEL) with only Barclays separating them.
I can see why.
Chunky income
As things stand, BP has a forecast dividend yield of 4.5%. Shell has a yield of 4%. These look great to me, especially as they’re higher than I’d get from a bog standard fund that tracks the FTSE 100 (around 3.7%).
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Yes, it’s possible to find companies with higher yields in the index. The problem is that this may be due to their share prices going through a period of significant weakness. It’s not the case that these strugglers are being more generous — a falling share price simply sends the yield higher!
There’s no guarantee these dividends will be paid either, especially if trading has been poor. By contrast, the dividends at both oil giants look like they will easily be covered by expected profit.
Rising tensions
But I think there are other reasons why investors may be clamouring more than usual for BP and Shell.
Chief among these is the oil price. This has been moving up steadily since the beginning of 2024 but it’s really been motoring over recent weeks in the wake of an increasingly unstable geopolitical background.
In addition to this, some of the world’s biggest producers — the US, Mexico, Iraq and Qatar — have been cutting output recently. Mexico has also reduced crude exports to the US by a third. That’s problematic for the latter as the weather improves and more of its citizens jump in their cars.
Factor in attacks on tankers by Houthi rebels in the Red Sea and it’s no surprise that their share prices have been rising in tandem. BP is up 12% this year. Shell is almost 18% higher — a sizeable gain for such a large company. The FTSE 100? That’s climbed by only 4%.
Despite this, both stocks still look cheap relative to the market as a whole. I can pick up some BP shares for less than eight times forecast earnings. Shell is only slightly more expensive on a price-to-earnings (P/E) ratio of almost nine.
The only timeline that matters (to me)
Of course, one thing that all investors in this space must appreciate is that they — and the companies they throw money at — have absolutely no control over the oil price. Put another way, BP and Shell can do everything right and still endure periods of negative sentiment. This goes some way to explaining the low valuations.
I’m also wary of placing too much significance on a single week’s trading. The Foolish mindset is one grounded in having a long-term perspective on stocks.
Out of interest, it’s worth pointing out that BP and Shell also featured on the online platform’s most popular sells last week too.
Not for me
As someone who is more interested in growth at the current time, I won’t be joining those who snapped up these top-tier stocks last week.
Nevertheless, I feel that either could easily be considered a core holding as part of a fully diversified income-focused portfolio.
