So, Mr. and Ms. Investor, sick of making next to nothing on your bank savings and money market funds? How would you like to make a nice, round 9% over the next 12 months?
That’s what you might earn in dividends from one of the world’s best-known corporations. And, of course, there’s a chance of making a gain on the stock price as well.
The catch? Well, OK, there is a small one. The company in question is British Petroleum (Stock Quote: BP), owner of the well spewing oil in the Gulf of Mexico. At the moment, BP is a kind of poster child for the dangers of pursuing yield without assessing all the risk.
Dividends are a share of corporate profits paid to shareholders. Dividend yield is the annual dividend divided by the current stock price. Many investors are tempted to see dividend yield the same way they see savings yield, or the interest you could earn on a certificate of deposit or savings account.
But there’s a big difference — risk. Most bank savings are protected from loss by federal insurance, dividends are not. BP’s dividend yield is high because the dividend has so far held steady while the share price has fallen. The stock is trading at around $31 a share, down from more than $60 in the middle of April.
The problem: What you make in dividends can be more than offset by what you lose if the stock price falls. That’s a risk with all dividends, not just BP’s.
To further complicate the BP situation, President Obama has criticized the dividend payment BP is scheduled to make on June 20. Obama feels BP should conserve its cash to pay for clean up and claims of Gulf Coast residents and businesses that have been hurt by the spill.