BP (LSE: BP.) shares can be found in many UK investor portfolios today. It seems that investors are drawn to the oil giant’s ‘blue-chip’ status (it’s one of the largest companies in the Footsie) as well as the dividends on offer.
But have the shares delivered for investors recently? Let’s see how much £10,000 invested in the shares five years ago would be worth today.
Average returns
On 28 February 2020, BP shares ended the day at 396p. Today however, they’re trading at 438p – roughly 10.6% higher.
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That means that the original £10,000 investment would now be worth about £11,060 (ignoring trading commissions and platform fees, etc.). That’s not a lot of capital appreciation over half a decade – it translates to a gain of just 2% per year.
Of course, we also need to factor in the dividends here. Crunching the numbers, I calculate that an investor who bought BP shares five years ago would have received a total of 96.51p per share in dividends. Assuming these weren’t reinvested, this income would have resulted in another £2,440 or so.
So, in total, they’d now have approximately £13,500. That equates to a total return of 35% or about 6.2% per year.
That’s not a terrible return. It’s higher than the returns from cash savings and roughly in line with the returns from the FTSE 100 index.
However, it’s worth pointing out that many stocks have produced much higher returns over the last half decade. Amazon shares, for example, are up about 120% in US dollar terms over the same period (that translates to almost 17% per year).
Long-term challenges
I’ll point out that I don’t think it’s a coincidence that Amazon shares have outperformed BP shares by a wide margin over the last half decade. Today, the world is rapidly becoming more digital and Amazon is at the heart of this evolution thanks to its booming online shopping and cloud computing divisions.
At the same time, the world is slowly moving away from oil. So, BP is facing long-term structural challenges and this is reflected in its share price.
Of course, the pandemic didn’t help the performance of BP shares. This resulted in a major drop in demand for fuel for a few years.
At the same time, the pandemic boosted demand for Amazon’s services significantly. With people stuck at home, online shopping and cloud computing saw huge growth.
Dividend income on offer
Now, BP shares could still play a role in a portfolio today so they could still be worth considering. Especially if one is seeking income – currently the dividend yield on offer is about 5.8%, which is attractive.
However, given the risks associated with the global shift to renewable energy (BP has recently backed away from its pledge to become a clean energy company), I think there are better shares to consider buying today. Over the next five years, I reckon a lot of other stocks will generate higher total returns.
Amazon is one stock that I believe is worth considering for the long term. Over the next five years, I think this tech company will get much bigger.
