BP plc isn't the only dividend stock with a promising future

The Motley Fool

When you're hunting for dividend stocks, it's tempting to focus on FTSE 100 giants such as BP (LSE: BP). But there are often smaller firms with more impressive track records, if you know what to look for.

So today I'm going to consider the dividend appeal of BP alongside that of a smaller company in a different sector.

Improvement needed

It's probably fair to say that oil and gas giant BP has been a good income investment over the last few years. Although the payout hasn't risen since 2014, the weakness of the pound against the dollar has meant that UK shareholders have enjoyed a pay rise.

However, it's also worth noting that BP stock has underperformed the market for long periods. The shares have only risen by 17% over the last five years, during which the FTSE 100 has climbed 28%.

Although BP has offered a higher dividend yield than the FTSE 100 for much of this period, I'm not sure it's enough to cancel out the weaker performance of its shares.

This could be the right time

The oil price needed for BP to cover its cash expenditure and its dividend has now fallen to $49 per barrel. Profits are rising and if Brent Crude can maintain its recent gains and continue trading around $60, then free cash flow should improve rapidly.

This should fund debt repayments, growth projects and potentially a dividend increase. Although BP stock looks expensive on a 2018 forecast P/E of 18, the 5.7% yield looks increasingly safe to me. I'd rate the shares as a buy at current levels.

An income alternative

One of the fastest growing sectors of the commercial property market is shared office space, where small companies hire space in serviced office buildings, rather than leasing their own premises.

My pick of the companies in this sector is FTSE 250 firm Workspace Group (LSE: WKP). This firm's shares rose by 3% today, after it reported a 25% rise in adjusted trading profit for the half year, and a 30% increase in the interim dividend.

The company said that customer demand remained "consistent" and that its like-for-like rent roll had risen by 4.1% to £63.5m during the period. Like-for-like occupancy rose by 1.5% to 92.4%, while new properties had lifted the total rent roll by 17.1% to £104.8m.

Don't rush in

Before you rush out and hit the buy button, I should caution that these shares aren't cheap. The group's share price has risen by about 20% since I last covered this stock in January. As a result, the stock's discount-to-book value has shrunk.

Based on today's figures, the shares now trade at a discount of just 8% to their book value of 1,014p. And even after today's dividend hike, the stock only offers a forecast yield of 2.8%.

The key risk with this type of business is that its tenants only have short-term commitments to rent. But Workspace's financial commitments are over much longer periods. So a slump in demand can cause profits to plummet.

For this reason, I'd prefer to pay less for shares in this firm. But if you believe the outlook for the economy remains stable, then Workspace could be a profitable buy at current levels.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended BP. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.