Five Dividend Paying Commodity Stocks to Buy Now
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Everyone is talking about global monetary policy these days, as many of the biggest economies in the world are trying to reinvigorate economic growth. The US, Europe, Japan, and even China are promoting low interest rates to fight against lackluster economic growth and even recessionary pressures in some cases. In this context, dividend paying commodity stocks look like a very strong sector to add to your portfolio.
Monetary policy is no exact science, and there is always a risk of raising inflation when everyone is going in the same –expansionary – direction. Commodities are an excellent hedge against rising prices, and companies in this sector usually see increasing earnings in an inflationary context. For this reason, commodity stocks are one of the best ways to protect your portfolio against the risk of inflation in the middle and long term.
If we add dividends to the mix, things look even better. A nice dividend yield is valuable in a context of ultra low interest rates like this one; but a strong dividend policy is much more than an extra source of income for investors. Companies which are able to sustain and increase their dividends over long periods of time and under various economic conditions need to have strong business fundamentals to prosper and reward shareholders regardless of the general economic climate.
Exxon (NYSE: XOM) is perhaps the safest dividend name among commodity stocks. The company is the biggest integrated oil and gas producer in the world-- by a wide margin -- and it has regularly increased its dividend in each of the last 29 years. The company is well known for its superior profitability and capital allocation efficiency, which is a very positive reflection about the quality of the business and its management team.
However, if you want a higher dividend yield while still staying within the safety of a high quality energy company, Chevron (NYSE: CVX) could be the right choice. Chevron pays a 3.2% in dividends versus 2.5% for Exxon, and its track record of consecutive dividend increases is only a bit shorter with 24 consecutive years of rising dividend payments. Chevron is another top notch energy producer, and it offers a higher dividend yield than Exxon.
If you venture beyond big energy companies things can get more risky and stock prices more volatile, but there are some very interesting possibilities to consider. The timber sector has experienced some rough years lately, due mostly to lackluster demand from the construction industry. But things are looking better for the sector lately, as many indicators are pointing to better times ahead for real estate and construction. Timber companies are offering not only a potential hedge against inflation, but also an interesting vehicle to ride the real estate recovery.
Plum Creek Timber (NYSE: PCL) is the biggest timber REIT in the US, as it has more than 6.6 million acres of land under management. The company has a very solid track record when it comes to maximizing the value of its land beyond logging activities and, being structured as a REIT, it's not required to pay federal taxes on its timber harvest activities. An exposure to rising commodity prices, a chance to benefit from a real estate recovery and a 4.1% dividend yield are some of the reasons to consider a position in Plum Creek Timber.
Among diversified commodity producers, BHP (NYSE: BHP) is one of the strongest names around. The company produces a wide range of commodities, from oil and gas to diamonds, including copper, nickel, coal and manganese, and it’s also one of the biggest players in the global iron ire industry. This Australian mining giant is conveniently located in proximity to Asian markets in general and China in particular. Yielding a 3.3% in dividends, BHP offers both a very reasonable valuation and the potential for capital gains in a bullish scenario for commodities.
A more focused bet on iron ore could be Brazil based Vale (NYSE: VALE). The company has lost more than 30% of its value in the last year due to a slowing economic growth in China – a big importer of iron ore – and some tax conflicts with the Brazilian government. But Vale is a fundamentally strong company, very profitable and trading at a really cheap valuation with a P/E ratio around 6. The company pays a 3.2% dividend yield and has plenty of upside potential from a valuation point of view once perspectives in the iron ore markets get better.
The current economic scenario looks quite favorable for dividend paying stocks in the commodity business. This alone wouldn´t be enough reason to buy if the fundamentals of individual companies were unattractive, but that is not the case. Both from a macro perspective and on a company level, there are some very interesting reasons to consider buying some dividend paying commodity producers.
acardenal owns shares of Vale. The Motley Fool owns shares of ExxonMobil. Motley Fool newsletter services recommend Chevron. 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.If you have questions about this post or the Fool’s blog network, click here for information.