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The Transocean Development Driller III, which is drilling the relief well, is seen surrounded by part of the oil slick covering the site of the BP oil spill in the Gulf of Mexico, off the coast of Louisiana May 12, 2010. (RICK WILKING/Rick WIlking/Reuters)
The Transocean Development Driller III, which is drilling the relief well, is seen surrounded by part of the oil slick covering the site of the BP oil spill in the Gulf of Mexico, off the coast of Louisiana May 12, 2010. (RICK WILKING/Rick WIlking/Reuters)

A dividend strategy for the brave Add to ...

BP PLC raised its quarterly dividend on Tuesday, increasing the payout to 8 cents (U.S.) a share from 7 cents -- a bump of about 14 per cent. What's interesting about BP, of course, is that this was a company that looked close to failure in 2010 due to the enormous costs associated with the DeepWater Horizon oil spill in the Gulf of Mexico.

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The increase is the company's first since reinstating the dividend last year, after it had ended payouts to conserve cash and lower the bad optics related to enriching shareholders. Now, though, BP has made it clear that it is by no means floundering: Its operating earnings rose to nearly $5-billion in the fourth quarter and its chief executive sounds encouraged, calling 2012 a year of "increasing investment and milestones."

For investors who love dividends, you have to wonder if there's a lesson here: While steadily increasing dividends are nice, turbulent payouts can also bring joys of their own if a company's underlying business remains strong.



During the worst phase of the Gulf of Mexico oil spill, BP cut its dividend to zero for three straight quarters, a nasty shock for investors who were counting on that money. Facing litigation and cleanup costs, you could be forgiven for thinking that BP's dividend -- if not BP itself -- was gone for good. Yet, this is an oil producer we're talking about, and oil production remains a thriving business with the price of crude hovering near $100 a barrel.

BP's dividend is still far below the 14-cent quarterly payout before the oil spill, but it's on the rise -- and so too is BP's share price, recovering about half the ground it lost during the oil spill crisis. Investors, then, get a double benefit here: A fast-rising share price and the prospect of substantial dividend increases, something that many of the more stable dividend-payers lack.

BP's situation is a little like that of TransCanada Corp.'s more than a decade ago. In 1999, faced with falling earnings and a perplexing mix of international assets, TransCanada slashed its quarterly payout to 20 cents a share from 28 cents, hammering the share price in the process. But this was and still is a thriving pipeline company. Since the cut, it has raised its quarterly dividend every year, to the point where the current distribution of 42 cents a share is 50 per cent bigger than the payout prior to the cut in 1999.

Admittedly, betting on dividend rebounds can be painful -- but usually in cases where a company's underlying business is under attack (think Yellow Media Inc. here, a formerly blue-chip income trust). It will be interesting to see if financials fit the pattern of healthy rebounds: A number of U.S. banks and Manulife Financial Corp. reduced their dividends in the wake of the 2008 financial crisis and recession. In most cases, they have yet to come back anywhere close to previous levels, largely because their underlying businesses remain turbulent. When thing improve, though, it's a good bet that payouts will start flowing again.

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