In more than 15 years as an investor, I’ve generated plenty of passive income by collecting generous dividends from commodity producers. I’ve sometimes been able to turn a nice profit when I’ve eventually sold my shares too.
However, it hasn’t always been plain sailing. I’ve also suffered dividend cuts and one or two nasty share price crashes when I’ve got my timings wrong.
Recently, I’ve been looking at shares in FTSE 100 oil major BP (LSE: BP). Shares in this £56bn group have underperformed rival Shell over the last year, falling by 30%. However, this slump has left BP with a tempting dividend yield of almost 7%.
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Why’s BP been falling?
Over the last year, BP’s faced criticism from activist shareholder Elliott Management. The American group was unhappy with its previous plan to cut oil and gas production by 2030 in favour of potentially less profitable renewables.
BP’s also seen its profits come under pressure over the last year, as oil prices have weakened. Broker forecasts for BP’s 2025 earnings have fallen by 40% since April 2024.
Earnings estimates for Shell, which produces more gas, have only dropped by 16% over the same period.
Things could be changing
In March, CEO Murray Auchincloss unveiled plans to scale back the group’s green ambitions and focus on its core fossil fuel business.
Chair Helge Lund has also announced that he will stand down from BP’s board after a new chair has been appointed. I think this opens the door for new leadership and greater clarity on the group’s direction.
That could lead to an improvement in business and share price performance, in my view. After all, flip-flopping on strategy isn’t really a good look for a FTSE 100 business.
Investors in a big company like BP expect to have a clear idea of what it will do to generate profits and support its dividend.
Should investors consider buying BP today?
BP shares fell at the start of April when President Trump’s tariff announcements triggered a sharp fall in the oil price. A barrel of Brent Crude oil now sells for around $66, down from about $75 at the end of March.
My reading of BP 2024 accounts doesn’t suggest any serious problems. Last year’s payout was covered 1.7 times by earnings and forecasts suggest a similar level of cover for 2025.
If market conditions stabilise, then I think the 7% yield on BP shares could provide a fairly safe passive income.
Looking ahead, the group’s new focus on fossil fuels could help to improve profitability. BP’s generally seen by the industry has having good upstream (production) assets and a strong trading business. This combination can be very profitable in the right circumstances.
I think it’s quite reasonable to expect BP shares to recover over the coming years.
My only real concern is that the uncertain outlook for the global economy means we can’t rule out the risk of a more serious oil price crash. After all, oil traded well below current levels from 2015 to 2017 and more recently in 2020.
On balance, I think it might be worth investors considering buying BP shares today as part of a diversified income portfolio. However, I think they should also keep a keen eye on changing market conditions.
