Why BP and SSE could offer income investing appeal

The share prices of BP (LON: BP) and SSE (LON: SSE) have risen by 27% and 20%, respectively, over the past 12 months.

Despite their gains, both stocks offer dividend yields that are significantly higher than the FTSE 100 index’s 3.5% yield. Indeed, BP has a forward dividend yield of 4.8%, while SSE’s prospective yield stands at 5.2%.

As a result, they could offer income investing appeal in an era of low interest rates. In addition, they are positioned to deliver rising shareholder payouts as they implement their long-term strategies.

SSE

SSE’s latest half-year results showed it is making encouraging progress in delivering on its low-carbon strategy. It has largely completed its £2.8bn disposal programme of non-core assets that enables it to focus on developing and owning assets in the renewables space.

The firm also expanded its reach to international locations, such as its entry into the Japan offshore wind market via a joint venture. This could further diversify its asset base, although it is likely to remain heavily focused on the UK.

The company’s pivot to renewable forms of energy production could place it in a strong position to deliver growth over the long run. For income investors, this could equate to a generous rise in dividends on an annual basis.

Indeed, SSE is aiming to raise shareholder payouts by the same rate as RPI inflation over the next two years. With the Bank of England forecasting a CPI inflation rate of 5% by April, this strategy could become increasingly attractive over the coming months.

Certainly, there remain question marks over the reliability and resilience of the firm’s earnings. For instance, weather changes, such as low wind levels, can have a material effect on its financial performance over the short run.
However, with one of the highest yields in the FTSE 100, investors appear to have priced in potential risks facing the business. As such, from an income perspective, it could offer investment appeal.

BP

While SSE has largely pivoted to low-carbon assets, index peer BP is at a much earlier stage of its renewables journey. Indeed, it is likely to remain heavily reliant on oil and gas markets for its profit over the coming years.

This could prove to be a positive for the firm. After all, the International Energy Agency (IEA) expects demand for oil to increase over the coming years due to factors such as rising wealth levels across emerging economies. And, with oil having historically been a successful hedge against inflation, BP may be able to overcome an inflationary global economic environment to at least some degree.

Of course, the long-term prospects for the firm are heavily dependent on its capacity to ultimately replace fossil fuel assets with renewables. Recent updates from the company suggest it is making progress in this aim, with it adding further capacity to its renewables pipeline in the most recent quarter.

Clearly, Covid-19 and the uncertain outlook for the world economy remains a threat facing the wider oil and gas industry. However, BP’s forward price-earnings ratio of 10 suggests this may be factored into its share price. With dividends expected to be covered 2.1 times by net profit this year, it could offer a relatively attractive, and growing, income stream over the coming years.