Basic materials are hot right now. With oil prices rising past $110 a barrel, copper setting all time highs, and steel close to its 2008 peaks, many investors are scouring the markets for good investment opportunities. Some investors look at basic materials as good dividend stocks - strong consistent dividends; however, it can often result in simply chasing the highest yield.
One can always ask the questions, 'is this a high dividend yield because it has strong earnings and good prospects or is it a high yield because the price is in decline due to fundamental questions about the company'. Finding a 5% dividend yield only to have the stock drop 10% in price is not very useful. When looking at investment opportunities it is important to dig a little deeper to understand the company's growth prospects and risk profile. However, for those interested in simply chasing yields here are the current top dividend yielding stocks in basic materials with at least $250 million in market capitalization.
| Ticker | Name | Yield (%) | Market Cap ($ Millions) | Industry |
| SCCO | Southern Peru Copper Corporation | 6.3* | 31,459 | Copper mining |
| SDRL | Seadrill Limited | 5.4 | 15,516 | Oil & Gas Drilling |
| RDS.B | Royal Dutch Shell | 4.3 | 245,007 | Integrated Oil & Gas Firm |
| SSL | Sasol Ltd. | 4.0 | 34,055 | Integrated Oil & Gas Firm |
| TRP | Transcananda Pipelines, Ltd. | 4.0 | 29,693 | Production and Pipelines |
| BTE | Baytex Energy Corp | 3.9 | 7,048 | Oil Exploration and Production |
| TOT | TotalFinaElf, S.A. | 3.9 | 149,907 | Integrated Oil & Gas Firm |
| SID | National Steel Corporation | 3.7 | 22,963 | Steel Production |
| NL | NL Industries, Inc. | 3.6 | 669 | Specialty chemicals |
| SE | Spectra Energy Corp | 3.6 | 18,697 | Oil and Gas Pipelines |
Data is provided by Zacks.com services downloaded on April 29, 2011 and is current as of April 28, 2011. *SCCO yield is 6.3% by both Zacks and Yahoo!Finance which represents an annual yield based on the most recent dividend of $0.58. Using the trailing twelve months dividends would give around 4.9% yield which would place it in 2nd place. This distortion will appear for any stock with irregular dividends.
As noted by the presence of oil companies above, I've included oil and gas companies as well as the traditional coal, steel, and paper companies. This list does exclude partnerships and trusts. The second list below reflects the highest yields in this category:
| Ticker | Name | Yield (%) | Market Cap ($ Millions) | Industry |
| CQP | Cheniere Energy Partners, LP | 9.3 | 485 | Production and Pipelines |
| BPT | BP Prudhoe Bay Royalty Trust | 8.2 | 2,487 | Oil & Gas Royalty Trust |
| CLMT | Calumet Specialty Products Partners, L.P. | 8.2 | 808 | Refining and Marketing |
| ENP | Encore Energy Partners LP | 8.1 | 1,123 | E&P MLP |
| MVO | MV Oil Trust | 7.9 | 476 | Oil & Gas Royalty Trust |
| FGP | Ferrellgas Partners, L.P. | 7.6 | 1,974 | Refining and Marketing |
| BBEP | BreitBurn Energy Partners, L.P. | 7.6 | 1,284 | Exploration and Production |
| SBR | Sabine Royalty Trust | 7.6 | 1,007 | Oil & Gas Royalty Trust |
| GLP | Global Partners L.P. | 7.2 | 602 | Refining and Marketing |
| NRT | North European Oil Royality Trust | 7.0 | 288 | Oil & Gas Royalty Trust |
| NRGY | Inergy, L.P. | 6.9 | 4,468 | Refining and Marketing |
| OXF | Oxford Resource Partners, LP | 6.9 | 262 | Coal |
Data is provided by Zacks.com services downloaded on April 29, 2011 and is current as of April 28, 2011.
The above two lists provide good starting points for looking for the highest yields, but the focus will be to find stocks with strong yields when also adjusted for risk and growth.
This method does face a couple of challenges since growth estimates can seem to be unrealistic at times for forward projects and historical rates can be misleading. For example, a company that has just started paying dividends might show significant growth that would be expected to slow. I created a couple of arbitrary steps and capped dividend growth at 20% for computing the one year forward dividend yield. I then capped the long term growth rate using the minimum of the historical dividend growth, the long term consensus EPS growth and 15%.
Analysis
The analysis focuses on the following companies that showed the greatest excess growth and dividend yield relative to calculated hurdle rate (a.k.a. required equity return). The first recognition is that the basic materials group included several agricultural and other types of companies (Monsanto) that might not typically be thought of as basic materials.
| Ticker | Name | Risk Free Rate | Beta | Equity Risk Premium | Hurdle Rate |
| MON | Monsanto Company | 3.3% | 0.8 | 6.0% | 8.3% |
| SU | Suncor Energy Inc. | 3.3% | 1.6 | 6.0% | 12.8% |
| NUE | Nucor Corporation | 3.3% | 1.0 | 6.0% | 9.5% |
| CLB | Core Laboratories N.V. | 3.3% | 0.8 | 6.0% | 8.2% |
| ENB | Enbridge Inc | 3.3% | 0.7 | 6.0% | 7.4% |
| ESV | ENSCO plc | 3.3% | 1.2 | 6.0% | 10.3% |
| UGP | Ultrapar Participacoes S.A. | 3.3% | 1.0 | 6.0% | 9.4% |
| CRR | Carbo Ceramics, Inc. | 3.3% | 0.6 | 6.0% | 6.7% |
| MUR | Murphy Oil Corporation | 3.3% | 1.0 | 6.0% | 9.2% |
| ADM | Archer-Daniels-Midland Company | 3.3% | 0.2 | 6.0% | 4.7% |
Data is provided by Zacks.com services downloaded on April 29, 2011 and is current as of April 28, 2011.
The next key component is the forward dividend yield which is based on the current dividend yield projected with the historical dividend growth rate. I capped this figure at 20% as well. It should be noted that this had limited impact on the results. Projected growth rates are the largest driver of the results with the adjustment from current dividend yield to forward dividend yield having the smallest impact.
| Ticker | Dividend Yield | Historical Dividend Growth | Forward Dividend Yield |
| MON | 1.7% | 28.1% | 2.0% |
| SU | 0.9% | 28.2% | 1.1% |
| NUE | 3.1% | 37.8% | 3.7% |
| CLB | 1.1% | 43.2% | 1.3% |
| ENB | 3.0% | 12.8% | 3.4% |
| ESV | 2.4% | 52.2% | 2.9% |
| UGP | 2.6% | 14.8% | 3.0% |
| CRR | 0.5% | 14.4% | 0.6% |
| MUR | 1.4% | 18.2% | 1.7% |
| ADM | 1.8% | 10.1% | 1.9% |
Data is provided by Zacks.com services downloaded on April 29, 2011 and is current as of April 28, 2011.
Putting it together shows the top 10 stocks as well as their "outperformance" measure.Top 10 Stocks adjusted for Yield, Risk and Growth
Data is provided by Zacks.com services downloaded on April 29, 2011 and is current as of April 28, 2011. Ticker Name Forward Dividend Yield Growth Used Hurdle Rate DRG Index Industry MON Monsanto Company 2.0% 24.1% 8.3% 17.7% Agricultural products SU Suncor Energy Inc. 1.1% 23.0% 12.8% 11.2% Canadian Integrated Oil NUE Nucor Corporation 3.7% 15.0% 9.5% 9.2% Steel Production CLB Core Laboratories N.V. 1.3% 16.0% 8.2% 9.1% Oil Field Services ENB Enbridge Inc 3.4% 12.8% 7.4% 8.9% Production and Pipelines ESV ENSCO plc 2.9% 16.0% 10.3% 8.6% Oil & Gas Drilling UGP Ultrapar Participacoes S.A. 3.0% 14.8% 9.4% 8.4% Production and Pipelines CRR Carbo Ceramics, Inc. 0.6% 14.4% 6.7% 8.3% Oil Field Services MUR Murphy Oil Corporation 1.7% 15.0% 9.2% 7.5% Integrated Oil & Gas Firm ADM Archer-Daniels-Midland Company 1.9% 10.0% 4.7% 7.2% Agricultural products
The stocks ranked 11 - 20 are listed below and include their industry groupings:
| Ticker | Name | Yield | Market Cap | Industry |
| NE | Noble Corporation | 0.4% | 10,606 | Oil & Gas Drilling |
| SQM | Sociedad Quimica y Minera S.A. | 0.9% | 15,234 | Mining/Chemicals |
| XEC | Cimarex Energy Co | 0.3% | 9,392 | Exploration and Production |
| EOG | EOG Resources, Inc. | 0.6% | 29,798 | Exploration and Production |
| RRC | Range Resources Corporation | 0.3% | 8,814 | Exploration and Production |
| PX | Praxair, Inc. | 1.9% | 32,540 | Diversified Chemicals |
| ARG | Airgas, Inc. | 1.7% | 5,810 | Diversified Chemicals |
| CCJ | Cameco Corporation | 1.4% | 11,615 | Other Mining |
| NBL | Noble Energy Inc. | 0.8% | 16,942 | Exploration and Production |
| POT | Potash Corporation of Saskatchewan Inc. | 0.5% | 47,352 | Agricultural Chemicals |
Data is provided by Zacks.com services downloaded on April 29, 2011 and is current as of April 28, 2011.
Conclusion
This analysis attempts to dig deeper than just looking at yield. However, it is still just a screening tool since it does not look at the fundamental valuations of any company. Nor does this analysis address any strategic questions or other qualitative assessments of the companies listed. Additional fundamental analysis would be critical prior to making any sort of investment decision; however, this offers a great starting point with a focus on the basic materials industries. The high level conclusions:
- The partnership and trust companies typically provided the highest overall yields. For an investor seeking current income, these are potentially the best opportunities. They also performed well on the adjustment for risk and growth. However since that list was close to the initial top 10 list, I excluded it from consideration but those stocks and tickers are: Legacy Reserves (LGCY), Encore Energy Partners (ENP), Cheniere Energy Partners (CQP), Targa Resources (NGLS), Alliance Holdings (AHGP), LInn Energy (LINE), Terra Nitrogen (TNH), Spectra Energy Partners (SEP), El Paso Pipeline Partners (EPB), Western Gas Partners (WES). The exclusion was largely over questions of the sustainability of their historical dividend growth and overall long term growth prospects.
- The top yielding basic materials stocks were driven by Oil and Gas companies from various sectors. While this analysis is naturally focused on U.S. and some Canadian companies due to stock listings, SCCO, a Peruvian company, had one of the two highest yields. Increasing demand for copper and rising copper prices may make this a very attractive investment.
- The top yielding basic materials stocks when adjusting for risk and growth had no overlap with the highest yielding stocks. The closest was NUE which had a yield of 3.1% and an estimated forward yield of 3.7%. Some of these stocks had yields less than 1%, but scored well since they had very strong growth prospects. Furthermore, these companies appeared to represent a more diverse group of industry segments further suggesting that they might represent growth champions.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Disclaimer: This article is for informational and educational purposes only and shall not be construed to constitute investment advice. Nothing contained herein shall constitute a solicitation, recommendation or endorsement to buy or sell any security.
