One of the drawbacks to investing directly in commodities, or in derivatives contracts like futures and options, is that they don’t pay dividends.
But the same isn’t true of commodities producers. Many oil and gas companies, miners and commodities traders have decent yields. Plus, they offer the potential for share price appreciation if the commodities they produce rise in price or the company adds value in other ways.
The prices for commodities 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 ramps up.
That same demand can also cause prices for other goods and services to rise, but commodities investors are at least somewhat cushioned from that inflation, as the price of raw materials they own in physical form or via producers also rises.
“Investors who are after inflation protection, capital appreciation and dividends should really dig into the commodity equity space,” says Daniel Bustamante, managing partner and chief investment officer of hedge fund Bustamante Capital. Here’s a list to get started with:
*Source: Fidelity, as of April 17.
Speaking of digging in, we’ll start with mining companies.
Rio Tinto is the second-biggest mining company in the world based on market value, after its rival BHP Group Ltd. (BHP). Both are solid companies with strong dividend yields, but Rio Tinto takes the pole position with a forward dividend yield of 6.5% as of April 17.
Rio Tinto produces aluminum, copper and iron ore and is developing a lithium project. Copper demand is expected to increase because it is needed to build renewable energy installations and connect them to electrical grids. Copper and lithium are key materials for electric vehicles.
In an analyst note on April 17, RBC Capital Markets said Rio Tinto provides “compelling” free cash flow and dividend yield and a strong balance sheet.
Like Rio Tinto, Vale is a diversified mining company. It produces iron ore, nickel, copper, cobalt and other materials.
Producing multiple metals or materials can help cushion the companies in the volatile world of commodities. When one commodity’s price is down – like nickel’s is at the moment because of oversupply from Indonesia – a stronger-performing metal like copper, which is up about 8% over the past year, can provide a hedge.
Vale is the world’s biggest iron ore producer, and this product is key to making steel, a material that is crucial for economic growth, as it is used in buildings, infrastructure, vehicles and appliances.
The stock is yielding 11.9%, giving it the highest dividend payout percentage on this list.
Archer-Daniels-Midland Co. (ADM)
A high yield isn’t everything, however. Investors should also consider how long a company has paid a dividend and how often it raises its payout.
“We think that the best dividend stocks aren’t simply the highest-yielding dividend stocks,” Susan Dziubinski, an investment specialist for Morningstar, said in a blog post on April 15. “Instead, we suggest that investors look beyond a stock’s yield and instead choose stocks with durable dividends and buy those stocks when they’re undervalued.”
High-quality companies that have grown their dividends for at least 25 consecutive years are known as Dividend Aristocrats. The ProShares S&P 500 Dividend Aristocrats ETF (NOBL), an exchange-traded fund, focuses exclusively on these companies, which generally have stable earnings and strong histories of profit and growth.
Archer-Daniels-Midland is the sixth-largest holding in this fund. One of the largest agricultural commodity trading firms in the world, ADM is yielding 3.3%, and according to Dividend.com, it has increased its dividend for 52 consecutive years.
This oil and gas producer is the fund’s No. 2 holding. A household name, Exxon has raised its dividend for 41 consecutive years. It is yielding 3.2%.
In a recent investment strategy letter, Madison Investments, which offers the Madison Dividend Income Fund (MDMIX), highlighted Exxon, which is included in the fund. “We believe it has attractive low-cost acreage in the Permian Basin and has a…
Read More: 7 Commodity Stocks to Buy for Dividends, Inflation Hedging | Investing