Which UK stocks can fill the BP income gap?

The suspension of  BP’s dividend, for the remainder of 2010 at least, has left a large hole in the dividend yield expected from the FTSE this year.

While it remains uncertain whether the suspension will continue beyond this year amid ongoing efforts to tackle the aftermath of the blown-out well, the impact is significant for UK income hunters because prior to the rig disaster in April, BP was expected to provide up to 12% of the dividend flow for the FTSE in 2010.

Michael Clark, who runs Fidelity Income Plus and Fidelity Enhanced Income funds, sold out of his weighting in the oil giant back in April, soon after the disaster.

He is not too concerned about the gap left by the company’s dividend non-payment, however, due to a glut of what he believes are attractive income-producing alternatives in the  FTSE.

Clark told Citywire: ‘I don’t see the non-payment of the BP dividend to be a major problem for income funds in general as there are other high yielding stocks to choose from in pharma, utilities and telecoms that will help meet the income target.’

But he added: ‘It depends on the size of the BP holding the fund had to begin with.’

Healthcare and telecoms

Schroder Income co-manager Nick Kirrage is also not too fazed by the cut due to his view that there are an attractive range of stocks and sectors paying reliable and sustainable dividends.

He said: ‘BP may have suspended its dividend payments but there are still plenty of ways to access attractive yield in the UK market. Telecoms and healthcare in particular, are sectors which offer a high dividend yield alongside good long-term capital security.

Within telecoms, Kirrage’s stand-out pick is Vodafone. ‘It is a stock on a low valuation with a strong balance sheet and a dividend which is well covered by strong cashflows.’

In healthcare, Kirrage picks out AstraZeneca  because it offers ‘a combination of prodigious cash generation, balance sheet safety and a strong growing divi)dend’.

His Schroder Income co-manager Kevin Murphy says AstraZeneca compares very favourably with Neil Woodford’s utilities favourite, National Grid , which he believes does not generate enough cash to pay its dividends.