Despite BP, high yields are still worth chasing

Alex Brummer says blue chip stocks that pay a handsome stream of dividends are — usually — a reliable bet

First, I have a serious confession to make. For as long as I can remember, my informal advice to any UK investor considering a share purchase — particularly during the volatile years of the ‘great panic’ followed by the ‘great recession’ — has been to buy BP.

In a world ever more desperate for energy, the oil price had only one direction to travel over the long haul and that is upwards. BP looked particularly well placed to benefit because of its exposure (around 40 per cent of its income) to the United States and its uncanny knack for making discoveries in safe political neighbourhoods from the Gulf of Mexico to Alaska. Unlike its main European rival Shell (with its heavy exposure to Nigeria) it also paid a handsome dividend. Indeed, before the Deepwater Horizon disaster, it was contributing £1 out of every £7 of income received by the nation’s pension funds and savings institutions. In lists of high-yielding shares — that is, those paying the most dividend — BP had long been top of the league.

Despite BP’s modern record of safety disasters from pipe leakages in the pristine wilderness of Prudhoe Bay in Alaska to the deadly Texas City disaster of 2005, one assumed that the high yield, at around 7 per cent before the Gulf spill, was the result of huge cash generation and a healthy balance sheet. How wrong you can be. High yields, especially in the lower reaches of the FTSE 250, are as likely to be a light flashing red for danger as to be an investment come-on.