British Petroleum (BP) is one of only about 50 companies in the world that paid out more than $4 billion in dividends last year. BP pays dividends both on its ordinary shares in the United Kingdom and on its American Depository Shares (ADSs) in the U.S. The BP dividend is a vital source of income to investors all over the world. Not only is it one of the top dividend payers in terms of total dollars, but it is also one of the highest yielding big dividend stocks. As of this writing, BP’s American Depository shares offered investors a yield north of 6.5%.
In an environment of negative and ultra-low interest rates, BP’s 6%+ yield has appeal to many, but the company’s dividend can be confusing to some U.S. investors who may not be familiar with BP’s dividend conventions.
BP’s Optional Dividend
Unlike most dividend paying stocks, BP offers holders of both its ordinary and ADSs the option to take dividends in the form of additional shares. BP calls it a scrip dividend program and you can read more than you ever wanted to about it on BP’s website, but to be candid, the explainers use unfamiliar terms that tend to confuse the uninitiated.
We will try to keep it simple here.
The ADS shares are how most Americans buy BP shares. The script dividend program on the ADSs allows holders of BP shares to receive their dividend in either cash or stock.
If like most investors you hold your securities at a broker, you will get a voluntary corporate action notice each quarter when BP declares its dividend asking if you want to take your dividend in additional shares or cash. Cash is the default option so you can ignore the notice if you prefer cash over additional shares.
If you want to take your dividend in the form of additional shares, there should be a number of the notice for you to call to participate.
BP Cash Dividend vs. Share Dividend
If you decide to take your BP dividend in shares instead of cash, the number of ADSs you will receive is calculated in the following manner.
- First find the dollar amount of dividends to be paid on ADSs owned.
- Next, average the ordinary shares listed in London but converted to U.S. dollars for the 5-day period just prior to the ex-dividend date for the ordinary shares.
- Now convert that figure to ADS shares by multiplying by six (there are six ordinary shares in one ADS) and adding $.05 for a depository fee paid by those choosing to take dividends in shares.
- This number is divided into the total amount of dividends paid on the ADS.
In numbers, you would have something like the following:
- Total Dividends = 1,000 ADSs x $.60 Dividend = $600
- 5-day Avg London listed ordinary price converted to USD = $6.1 +$6.3 +$6.6+$6.2+$6.3 = $6.3
- ADS price = ($6.3 * 6) +.05 = $37.85
- Number of ADSs due = $600 / $37.85 = 15.852
Taxes on BP Dividend
If you take your BP dividend in shares instead of cash you don’t escape the wrath of the IRS. Tax consequences can vary with individual circumstances, but in general, U.S. investors in American Depository Shares will owe tax on a BP dividend whether it is taken in shares or in cash.
If the BP scrip dividend sounds complicated, that’s because it is. The simplest and best solution for most U.S. based investors is to elect to receive BP dividends in cash by ignoring the voluntary corporate action notices that come quarterly on BP shares.
Jeremy Jones, CFA
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