Dividend stocks in the commodity market can show quite volatile price movements, but they do offer some protection against inflation. If you’re looking for income, inflation protection and capital growth, these stocks are worth considering.
One of the disadvantages of investing directly in commodities, or in derivative contracts such as futures and options, is that you do not receive dividends. You don’t have that problem with shares of commodity producers.
Many oil and gas companies, miners and commodity traders offer decent returns. In addition, you can benefit from share price appreciation if commodity prices rise or if the company adds value in other ways.
Inflation hedge
Prices of raw materials such as oil and copper tend to rise when the economy is doing well or is expected to improve, as demand from the industrial sector increases. That higher demand can also cause the prices of other goods and services to rise, fueling inflation. If you invest in raw materials, you are partly protected against rising inflation, as raw material prices also rise.
The American investment website US News Money selected seven stocks in the commodities sector with a relatively high dividend yield.
1. Rio Tinto
Rio Tinto is the second largest mining company in the world by market value. At number one is rival BHP Group. If we look at the dividend yield of 6.5%, Rio Tinto deserves the top position.
According to RBC Capital Markets, Rio Tinto is attractive because of its free cash flow, dividend yield and a strong balance sheet. The mining company produces aluminum, copper and iron ore and is developing a lithium project. Copper and lithium are important materials for electric vehicles and so their demand is expected to increase due to the energy transition.
2. Vale SA
Brazil’s Vale is a diversified mining company, with a dividend yield of 11.9%. That’s the highest on this list. The drop in the price may also play a role in this: the price has fallen by almost 17% since the turn of the year.
Vale produces iron ore, nickel, copper, cobalt and other materials, and that broad palette could help in the volatile commodities sector. When the price of one commodity falls, a possible price increase in another commodity can provide a counterbalance.
Vale is the world’s largest iron ore producer. The production of steel is crucial for economic growth, due to its applications in buildings, infrastructure, vehicles and equipment.
3. Archer-Daniels-Midland
Vale may have the highest dividend yield, but a high yield doesn’t mean everything. Investors should also look at the sustainability of the dividend. How long has a company been paying dividends and how many times has it increased the payout?
Morningstar investment expert Susan Dziubinski believes that investors should primarily choose undervalued stocks with sustainable dividends. Consider, for example, so-called dividend aristocrats: companies that have increased their dividend for at least 25 years in a row. These companies often have stable revenues and strong profit and turnover growth.
Archer-Daniels-Midland is an example of this. It is one of the largest agricultural commodity trading companies in the world, with a dividend yield of 3.3%. The company has been increasing its profit distributions for 52 years in a row.
4. Exxon Mobil
Exxon Mobil is another Dividend Aristocrat. This has been increasing for 41 years in a row oil major its profit distributions and dividend yield are now 3.2%. According to Madison Investments, Exxon Mobil has attractive and beneficial oil fields in the Permian Basin and significant growth opportunities in Guyana.
Furthermore, the analysts speak of a sustainable competitive advantage due to the size and scale of the company and the ability of the Americans to integrate their refining and chemical assets.
5. Pioneer Natural Resources
Exxon Mobil is in the process of acquiring Pioneer Natural Resources, but the deal has not yet been closed. The oil and natural gas exploration and development company currently delivers a dividend yield of 4.1%. According to Morningstar, Pioneer is cheap, trading at about 13% below fair value. Scotiabank raised its 12-month price target on Pioneer from $230 to $282 in April.
The company is expected to report a lower annual profit, but revenues are expected to be 16% higher. Over the past four quarters, Pioneer has exceeded earnings per share estimates three times.
6. National Fuel Gas
Energy company National Fuel Gas is a favorite of the hedge fund Bustamante Capital. It manages natural gas assets in four business segments: exploration and production, pipeline and storage, gathering and utilities.
One of the reasons for the enthusiasm is the very low price-to-earnings ratio and the share buyback program of up to $200 million. The company has increased its dividend for 54 years in a row. The dividend yield is currently 3.8%.
7. Suncor Energy
This Canadian energy company is another favorite of Bustamante. The stock currently delivers a 4.2% dividend yield.
Suncor operates in oil sands and offshore oil and refines petroleum in Canada and the United States. The company also has distribution and wholesale networks, trading primarily in crude oil, natural gas, by-products, refined products and electricity. Bustamente expects a special dividend or a higher share buyback program in the coming quarters.
Also read: 6 growth stocks that also pay dividends
