When I sat down to write this article, the best easy access Cash ISA rate I could find was just 1.31%. This means that if you had savings of £20,000 in your Cash ISA, you’d get just £262 per year in interest.
I don’t know about you, but that doesn’t seem very attractive to me.
That’s why I prefer to put most of my spare cash into the stock market, where much higher returns are possible. The company I want to discuss today currently offers a dividend yield of 6.3%.
If you invested your £20k lump sum in this stock and accepted that the value of your shares might rise or fall, then you could potentially receive an income of £1,260 each year.
Remember – although you can’t hold shares in a Cash ISA, you can still keep stock market investments tax-free by using a Stocks and Shares ISA.
I think it’s the right time to buy
The company I want to talk about today is BP (LSE: BP). The BP share price has fallen over the last year, but I believe this oil and gas giant has reached a turning point. A series of acquisitions and disposals has been completed and the group is now better positioned for the next stage of its evolution.
Financially, we should now see an improvement in cash generation and a reduction in debt levels. In time, I expect this to support a return to dividend growth.
The other big part of the story will be how BP adapts to the need for a greener future. So far, my feeling is that the group’s actions in this area have lagged those of Royal Dutch Shell. But I think we will soon start to see a faster pace of change.
BP has recently appointed a new chief executive, Bernard Looney, who will take charge of the group in February. Looney is 15 years younger than outgoing boss Bob Dudley and has made it clear that his top focus will be to help the company to “meet society’s demand for cleaner, better energy”.
A cynic might say that there’s not much an oil and gas company can do to reduce pollution. But BP has huge scale and resources. I think we’ll be surprised over the coming decade at how this business is able to adapt and evolve.
A top income buy
For patient investors who want a reliable income, I think BP is a good choice. Analysts expect the group’s underlying earnings to rise by 13% in 2020, increasing the level of cover for the dividend.
Although the starting yield of 6.3% is already very attractive, I’m fairly sure that we’ll see a return to dividend growth over the next few years.
Although some commentators have flagged up the risk that oil and gas producers such as BP might be forced to cut back production to meet new environmental standards, I think that’s unlikely for the foreseeable future.
I believe that global demand for transport fuels and gas will remain higher for longer than many people expect. Gas will remain a particularly important fuel, in my view.
If you’re looking for a buy-and-forget income stock, I believe that BP is worth considering. The 6.3% dividend yield looks very safe to me, and I believe this payout has the potential to grow over time.
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Roland Head owns shares of Royal Dutch Shell B. The Motley Fool UK has no position in any of the shares mentioned. 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.
Motley Fool UK 2020