Every investor loves dividends but finding the market's best dividend stocks isn't easy. Indeed, finding the perfect mix of both a current high dividend yield and room for further payout growth is tricky. What's more, finding a blue-chip stock with these qualities only adds to the complexity of income hunting. There are plenty of small and mid-caps with high dividend yields, but the quality of these payouts is questionable, which is why blue-chip payouts are considered to be the best.
Today, there's really only one that offers both a high dividend yield and has room for further payout growth.
The company in question is oil major BP(LSE: BP). At the time of writing, shares in BP support a dividend yield of 6.8%. And while the market seems to believe that this payout is unsustainable, over the past few years management has done everything it can to ensure shareholders are not disappointed. The cash has continued to flow.
If a company's dividend yield exceeds the market average by a significant amount, it is accepted that the market believes the payout is unsustainable. It seems this is why shares in BP continued to support a yield of nearly 7% despite the oil price rally that's taken place over the past 12 months. Investors just don't believe that the payout is sustainable.
However, even though the market may believe that the payout is unsustainable, BP's management is entirely committed to it. Over the past few years it has aggressively cut costs at the company, sold down non-core assets and cut capital spending to ensure the firm is not living beyond its means and can continue to produce returns for shareholders. These actions have, so far, helped the company maintain the dividend and now oil prices have started to firm up, they should ensure that BP's profit quickly returns to near-historical levels.
City analysts have pencilled-in a pre-tax profit for the company of £8.8bn for 2017, rising to £11.2bn for 2018. Off the back of these two forecasts, analysts are expecting earnings per share of 28p for 2017, rising to 35.5p for 2018. This year the company is projected to pay out 32p per share in dividends, which is just over the expected per-share earnings figure but by 2018 analysts expect the payout to be wholly covered.
The bottom line
So, barring any unforeseen circumstances, it looks as if BP's dividend payout will remain at today's level for the next two years, at which point earnings will have risen to the point where the payout is wholly covered.
But as with all income stocks, sudden unforeseen events could derail City projections for BP. However, unlike many other dividend stocks, BP has plenty of cash on the balance sheet to meet its obligations to shareholders if another large loss is forced on the group. At the end of 2016, the company had cash and short-term investments of $24bn. Last year the dividend cost company $4.6bn.
On the road to a million
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Rupert Hargreaves has no position in any 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.