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By Jeremy Glaser | 06-02-2010 04:48 PM

BP Dividend Yield Enters 'Sucker' Territory

Morningstar DividendInvestor editor Josh Peters thinks investors looking for steady yield have better options in the energy sector than BP.

Jeremy Glaser: I am Jeremy Glaser with Morningstar.com. BP's dividend yields has risen as the stock has fallen due to the oil spill disaster in the Gulf.

I'm here with Josh Peters, Morningstar DividendInvestor editor to see if this is an attractive dividend play or if investors should look elsewhere. Josh, thanks for talking with me today.

Josh Peters: Good to be here.

Glaser: So, should dividend investors be looking at BP for its over 7% yield right now?

Peters: Actually, last time I looked the yields was almost 9%, and that included a little bit of a bounce in the stock today. So, I mean, really, this is the kind of yield level, where the market is not perhaps screaming opportunity – you know, opportunity to earn a huge income, and perhaps huge capital appreciation as well. It's more of a sucker yield type of territory, where the price has fallen so far that it isn't just that this disaster can cost BP a lot of money, but conceivably could also force BP to cut its dividend at some point. That's what's now being priced into the stock. So to look at buying the stock today, I mean, it's not like buying a utility or a food stock or anything else with a normal sustainable yield, it's really much more of a deep value play.

Glaser: So it might not really be suitable for all investors who are just looking for income?

Peters: Yeah, I think that you really want to set the income component aside, and to say, if everything works out, if BP can manage its way through this disaster without having to cut its dividend, and in fact, we think that that is the most likely case that BP because of its size will be able to fund both its dividend and all of the litigation and recovery costs and other expenses associated with this, but it's subject to a very wide range of outcomes.

And it's not a dividend that you necessarily want to count on. You don't want the dividend yield alone in this expectation of income to be the reason you would consider buying the stock. Instead, you might buy it, because you think it's cheap, because the market has overreacted. Stock now trades at a fairly large discount to our fair value estimate, but with that it comes with a great deal of uncertainty. And I think that that level of uncertainty is something that a lot of more conservative dividend-seekers would probably just as soon avoid.

Glaser: Are there any names in the energy space that maybe are not so uncertain, but still have a reasonable dividend yield?

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