Commodity Stocks With Attractive Dividends
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Commodity producers provide a long term hedge against inflation, as inflation increases the earnings power and consequently the returns of these companies should also rise. At the same time, focusing on dividend paying commodity stocks can increase returns and reduce volatility by avoiding the most speculative companies.
Commodity prices are really hard to predict, but all the monetary stimulation that is taking place in the US, Europe and Japan has bullish implications for commodities in the middle and long term. Also, low interest rates are a positive for dividend paying stocks, since their attractiveness as income generators becomes better in comparison to other alternatives. Overall, current monetary policies in developed nations are a quite favorable for commodities producers with solid dividend yields, and those factors aren´t going to change any time soon.
ConocoPhillips (NYSE: COP) is a big integrated energy company that stands to benefit from rising oil prices. The situation with Iran, Libya and other oil producing countries is not showing any improvement, and oil prices tend to react strongly to conflicts and uncertainty. ConocoPhillips is restructuring its operations by separating the exploration and production business from the refinery operations, which could increase growth prospects in the middle term.
The company pays a 3.4% dividend yield and has been consistently increasing its dividend payments in the last decade. At a forward P/E of less than 9 ConocoPhillips is reasonably valued in comparison to its peers, Exxon (NYSE: XOM) trades at a forward P/E of 9.6 and has a 2.2% dividend yield, while Chevron (NYSE: CVX) has a forward P/E of 8.3 and yields a 3% in dividends.
Iron ore has been quite volatile lately, and will probably continue in that way for some time. China is the major player in this market, and economic statistics in that country are showing some worrying signs in the last months. The possibility of a slowdown in residential construction and infrastructure investment in China could have a material impact in the iron ore market. However, long term demand from emerging markets has attractive prospects, and construction is still at very low rates in the US, so it has plenty of upside room.
Long term fundamentals for iron ore don´t look so bad in spite of short term concerns, and shares of Brazilian iron ore producer Vale (NYSE: VALE) are quite cheap trading at a forward P/E of 6.6. Vale rewards shareholders with a juicy 4.4% dividend yield, and has been strongly rising dividends since 2008. Shares of Vale are quite volatile, but they come with a very attractive valuation.
Plum Creek Timber (NYSE: PCL) is the biggest timber REIT in the US, with more than 8 million acres of land under management. Timber prices have been negatively affected by the sluggish construction activity in the US, but some recent data points are signaling that the worst for construction may be over in the current cycle. The credit and housing bubble was a global phenomenon, so to some extent we may say that the situation for timber prices has a lot of room for improvement in the following years.
Plum Creek pays a very attractive dividend yield of 4.3%, REIT companies need to pay at least 90% of their pre-tax income in dividends to avoid income tax at the corporate level, at the individual level timber REITs also have a favorable tax treatment. There are not many signs of a recovery in timber prices yet, but it may be time to acquire some cheap timber REITs like Plum Creek and start receiving dividends while waiting for a recovery.
Low interest rates around the planet are bullish for commodity prices and also convenient for dividend stocks, maybe the world's central banks want you to invest in this kind of companies.
Motley Fool newsletter services recommend Chevron. The Motley Fool owns shares of Plum Creek Timber Co. and has the following options: short MAY 2012 $33.00 puts on Plum Creek Timber Co., short MAY 2012 $33.00 puts on Plum Creek Timber Co. and short MAY 2012 $38.00 calls on Plum Creek Timber Co. acardenal has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.