BP (LSE:BP) shares are among the most popular to own by UK income investors. That’s likely due to its impressive historical track record when it comes to dividends. Recently, the yield has suffered thanks to the pandemic, but it still sits at a substantial 4.4%.
Let’s explore its performance in more detail and discover if there is a better energy company out there for me to buy.
Weak performance of BP shares
Despite the popularity of BP as an income investment, the performance of its shares over the last five years has been pretty underwhelming. A £1,000 investment in January 2017 would be worth around £780 today based solely on the stock price movement. When taking the approximate £340 of dividends that would have been received during that time, the total rises to £1,120 – a 12% return.
By comparison, the FTSE 100 has delivered only a 3.3% return over the same period. But while BP shares may have outperformed the market, the performance is still disappointing, in my opinion. So, what happened?
Obviously, the biggest drag on performance is the falling share price. And to be fair, it’s not really BP’s fault since the global pandemic is mainly responsible.
With lockdowns being enforced worldwide in 2020, most cars were parked rather than being on the road. The seemingly overnight collapse of demand for fuel decimated BP’s revenue stream. And consequently, the group suffered a record-breaking $20bn (£14.8bn) loss for the year.
Since then, the situation has improved. And management has already begun ramping up its investments in alternative revenue streams. The most significant is renewable energy infrastructure. As the world shifts away from its dependence on fossil fuels, BP intends to dispose of 40% of its oil & gas assets by 2030 – replacing it all with green energy technologies.
The transition process is undoubtedly going to be riddled with challenges. As such, the passive income-generating capabilities of BP shares could become compromised in the future. Only time will tell whether that will happen. But assuming the worst-case scenario, is there a better income investment in the renewable energy space?
A lucrative income enterprise
Greencoat UK Wind (LSE:UKW) owns a diverse portfolio of on- and offshore wind farms scattered across the UK. The company lets the weather generate green electricity, which is then sold to multiple energy providers, including SSE, Centrica (British Gas), and EDF Energy, to name a few.
This business model obviously has some risks. With no control over electricity prices, its revenue stream can be pretty unstable. However, with impressive operating profit margins of over 80%, the company should be able to absorb most adverse movements in regulatory energy price caps, I feel.
Looking at the past five years, the shares have risen by a respectable 17.6%. And when factoring in the additional income from dividends, a £1,000 investment in January 2017 would now be worth around £1,440 – a 44% return. That’s significantly better than BP shares.
With its wind farm portfolio continuing to expand, I believe Greencoat UK Wind could be a better source of passive income. Therefore, personally, I’m more tempted to add it to my portfolio than BP shares.