Best Dividend Stock to Buy Right Now: Realty Income vs. BP

Dividend yield alone doesn't tell you enough about a stock to make a final investment decision. That's highlighted by looking at BP (NYSE: BP) and its 5.6% yield and comparing it to Realty Income (NYSE: O) and its 5.3% yield.

If all you cared about was yield, you'd probably buy BP. And you'd probably end up sorely disappointed. Here's why Realty Income is a better dividend stock.

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Examining the dividend

As noted, BP's dividend yield is higher than Realty Income's. Yield, however, is just a simple math equation, comparing the annualized dividend to the current share price. There are other factors to consider. One big one for dividend investors is dividend reliability, since many are looking to use the income they generate from their portfolios to pay for living expenses.

Realty Income has increased its dividend annually for 30 consecutive years. BP cut its dividend in 2020. To be fair, BP cut its dividend along with a decision to broaden its carbon fuels business to include more renewable power and clean energy. According to the CEO at the time, it was a decision deeply rooted in strategy.

There's just one problem: BP has since walked back its commitment to clean energy and renewable power. What's notable is that Realty Income has made some big strategic moves, too. For example, it exited the office property sector, expanded geographically into Europe, and is currently starting an asset management business geared toward institutional investors. None of these moves involved a dividend cut.

You might argue that BP is an oil company and therefore different. That argument loses strength when you consider that fellow integrated energy giant TotalEnergies (NYSE: TTE) also pivoted toward clean energy and renewable power. Unlike BP, TotalEnergies didn't cut its dividend, and it hasn't walked back the strategic decision it made, either.

BP may have a slightly higher yield, but it hasn't proven that it has the same level of commitment to returning value to shareholders via a reliable dividend. If you need your dividends to pay for living expenses, Realty Income wins hands down.

Examining the business model

Investors might still fall back on the argument that BP and Realty Income have very different business models. That's absolutely true. Realty Income is a large real estate investment trust (REIT). It owns income-producing properties in the United States and Europe, with a focus on single-tenant retail assets leased using a net lease approach. A net lease requires the tenant to pay for most property-level operating costs.

Realty Income is the largest player in the net lease space, with a portfolio of more than 15,500 properties. Although any single asset is high risk because there is just a single tenant in the property, across a large portfolio, the net lease approach is fairly low risk. This is because the cost and effort of maintaining properties is pushed onto the tenant. Without question, Realty Income is built to be a boring and reliable dividend stock, noting that its business is backstopped by an investment-grade-rated balance sheet.

By contrast, BP operates in the oil patch, where commodity price volatility is the norm. Financial results in the energy sector tend to rise and fall along with oil prices. In that regard, investors should expect BP's earnings to swing widely. It seems logical that this would lead to dividend volatility as well.

Only peers ExxonMobil and Chevron have managed to increase their dividends for decades through both good and bad oil markets. Once again, BP falls short.

BP has one of the highest yields among its closest integrated energy peers. Given the dividend history, that's hardly surprising, though having a debt-to-equity ratio that's twice that of the next closest peer is an issue that likely also worries investors.

All in, despite an attractive yield, BP just isn't that attractive as a dividend stock.

Be careful what dividend yields you buy

In many ways, comparing BP and Realty Income is like comparing apples to oranges. However, they have similar yields and would likely fall very close to each other on a search based on dividend yield. Realty Income has proven it is a reliable dividend stock. BP has proven it isn't.

That said, there are other oil stocks that have proven to be more reliable dividend investments, with TotalEnergies even offering a slightly higher yield.

Reuben Gregg Brewer has positions in Realty Income and TotalEnergies Se. The Motley Fool has positions in and recommends Chevron and Realty Income. The Motley Fool recommends BP. The Motley Fool has a disclosure policy.