Buying heavily discounted positions in BP…for my kids

bpAfter recently getting a hefty tax refund, I decided I had enough cash to buy my kids a starting position in BP, aka British Petroleum. Why?

  • They are paying about a 5.8% dividend.
  • They’re balance sheet of assets and earnings in dollars is about the same as when they were trading at $60+/share.
  • They have already doled out much in payments regarding the Deep Horizon oil spill from 2010.

Essentially, they are still at risk of having to pay out more damages, but the odds are shrinking as time progresses. It might take more years to wrap this up, but that hasn’t stopped them from continuing to produce. When other investors get more emotionally comfortable, the price will in all likelihood rise back to that $60/share range.

I own a small piece of BP in my IRA. The place where I wanted to apply more cash was moving pieces of that refund into my children’s trustee accounts I set up a year ago. Essentially I can buy them a block of BP stock, set it on DRIP to auto-buy more shares as the payouts come, and let it auto-grow over the years.

Does this sound suspicious given that I am not myself buying more BP? I understand your position. If it was so glorious, why don’t I buy some myself? The truth is that I’m working on another investment that simply takes time to become available. So I have to sit on that cash until the time is right. As to buying for my kids what I buy for myself, already done. VNR, BP, and CVX are stocks I own and that I have also bought for my kids. The other thing I’m looking to investing in isn’t an option for them without setting up more complicated structures. So in the meantime, I am happy to buy chunks of stock in companies that have performed well for years.

I believe BP is suffering an emotional roller coaster not tied to the their actual value. When they return to the $60s, then the equity position I have just bought for my kids will rise 50%. Awesome!

Stay tuned!

What to do with the change in your sofa

My Roth IRA had some spare change sitting around. Essentially, the stocks I had invested left me with about $56, well below the price of any of my stock holdings. This is what happens when you pipe money into your brokerage account and can only buy whole shares.

For my regular brokerage account, this hasn’t been a problem. Since I’m using the monthly dividends to pay off my low interest HELOC, I simply tacked on it’s spare $10 into the next month’s payment. But my Roth IRA is different.

I setup a Roth IRA years ago. It was invested in some mutual funds. I transferred all the funds to another brokerage house, but then repurposed all that money into General Dynamics, Berkshire Hathaway, Apple, and Chevron. Amidst all that, I was left with $56 in change. Since then, I have checked the “DRIP” option on each of those to route all dividend payments into new units of stock. So what was I to do with that loose change in my Roth sofa?

I decided to buy one share of British Petroleum (BP). You may remember them as the company responsible for the oil leak in the Gulf back in 2010. Their stock price had peaked at $61.64 until that catastrophic leak. Their stock price plummeted. Despite paying out almost $42.2 billion in claims and resolving federal charges laid against them by the Department of Justice and the SEC, BP still generated $400 billion in revenue last year. This has resulted in a P/E ratio of 5.09 while sporting a dividend yield of 5.0%. I don’t think I’ve ever seen a stock selling so cheap while having such a high dividend yield, such that those two numbers are the same! My hope is that BP will successfully weather this storm and continue to generate dividends which I can use to grow my position.

Some of the risk involved with investing in BP is that there may be more claims coming. There are chances they may have to pay some other fines as high at $17.6 billion. They also made a dividend cut, which explains why Dividend Growth Investor sold his position after holding it for a long time. Hence the reason I only entertained using this as a place to invest the change in my sofa. I’m not ready to buy a bigger position in BP, and I don’t have the spare capital right now to do so. This move certainly puts BP on my shortlist of stocks to watch. There are others I’m monitoring as well. We’ll see how it does.

P.S. After writing this article, I observed that Dividend Growth Investor has purchased a new position in BP. Go figure!