Why I'd avoid this dividend stock and buy 6% yielder BP plc instead

I believe it's time for investors to get choosy about dividend stocks. With the FTSE 100 trading at the lowest levels since December 2016, there's plenty of choice for income hunters.

A quick review of the big-cap index shows around 40 stocks with a forecast yield of at least 4%. If you expand your search to include the FTSE 250 as well, that number rises to about 100.

Today I'm looking at two dividend stocks I'd like to own at the right price.

A mixed picture

In my opinion, energy services firm JohnWood Group (LSE: WG) -- now known as 'Wood' -- is a good company. But last year's £2.2bn acquisition of rival Amec Foster Wheeler will take a while to digest.

The Wood share price was down by 5% at the time of writing, after the firm's 2017 results revealed a full-year loss of $30m, thanks to $165m of one-off costs.

These figures show that the group's pro forma revenue -- adjusted to include Amec Foster Wheeler for comparison purposes -- fell by 12% to $9,882m last year. Proforma adjusted operating profit fell by 11% to $598m. Adjusted operating margin was unchanged at 6%.

Looking at the actual figures, Wood ended last year with adjusted earnings of 53.3 cents per share, 16.8% lower than in 2016. Despite this, the dividend was increased by 3% to 34.3 cents per share.

Too soon to buy?

I'm confident that as the oil and gas market recovery continues, earnings will improve. I'm also fairly comfortable that the group's management will do a decent job of integrating Amec Foster Wheeler, which is expected generate cost savings of $170m over three years.

However, the Amec deal has left the combined group with net debt of $1,646.1m. This equates to 2.4 times earnings before interest, tax, depreciation and amortisation (EBITDA).  The company aims to reduce this to between 0.5x and 1.5x EBITDA "within approximately 18 months". I believe this could be challenging.

Earnings are expected to rise by 16% this year, putting the shares on a forecast P/E of 13.5 with a prospective yield of 3.7%. This could be good entry point. But with debt reduction a priority, I don't think there's any rush. I'd watch for opportunities to buy below 600p.

Why I'd snap up this 6% yield

Services companies like Wood have yet to see the full benefit of the oil market recovery. But producers such as BP (LSE: BP) are already one step ahead. They've cut costs and are enjoying surging profits thanks to higher oil prices.

BP's underlying earnings are expected to rise by 40% to $0.44 per share this year. This should provide additional support for the dividend and enable the group to start reducing its debt levels.

Forecast dividend cover of 1.1x earnings is still slim, but it means the payout will be covered by earnings for the first time since 2015. I believe that hitting this milestone means the dividend should be safe for the foreseeable future. The $0.40 per share payout could even start to rise over the next few years.

BP's share price has fallen by nearly 15% since January. Trading on a 2018 forecast P/E of 15 with a prospective yield of 6.1%, I rate the stock as a strong buy for income.

Buy-And-Hold Investing

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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.

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