By Jared Cummans
Over the years, value investing has emerged as one of the favorite strategies for a number of individuals and advisors. A steady stream of income that dividends provide can help protect a portfolio from market dips as well as adding an inflation hedge. The methodology has become so popular that some investors swear by it and are uneasy about making allocations to anything that lacks an important dividend yield. Many feel that value principles conflict with the commodity space; when someone thinks of commodity investing, they typically think of active trading of futures contracts or exchange traded products. But there are a number of securities that may be overlooked [see also Dividend Special: Top Companies In Every Major Commodity Sector].
With commodities playing a small, but pivotal role in a diversified portfolio, value investors have only one reason for not adding exposure; troubles finding commodity investments that pay dividends. Below, we outline three commodities whose underlying investment vehicles often offer strong dividend yields to maintain the steady income stream that your portfolio relies on [see also Dividend Special: Four Commodity Stocks Yielding Over 5%].
Coal is one of the most important energy sources in today’s world. It is primarily used as energy for power plants the world over, helping to generate roughly 40% of the world’s electricity. Although concerns remain over its relatively ‘dirty’ nature when compared to other fuel sources, the fact remains that coal is by far one of the cheapest and most abundant sources of fuel in the world today. China is by far the largest producer in the world, with the U.S. coming in second, followed by Australia. As far as value options are concerned, there are two stocks that stand out from the rest [see also Ultimate Guide To Coal Investing].
- Arch Coal Inc. (ACI): Stationed in St Louis, this company engages in the production and sale of coal through out the US. The stock features a market cap of $3.4 billion, giving it a nice size to go along with its robust daily volume of nearly seven million. ACI pays out a healthy dividend yield of 2.7%, but be aware that the stock has been under a fair amount of pressure over the last few months.
- Yanzhou Coal Mining Company (YZC): Yanzhou is stationed in China and focuses on the mining and production of coal through out China, Australia, Japan, and South Korea. Though not as liquid as ACI, this firm has a market cap of $12 billion, making it a potentially safer play. YZC has a current dividend payout of 3.4%.
Copper, one of the oldest commodities, is among the most widely-used industrial metals in the world. The reddish-brown commodity is best known for its excellent conductivity for electrical wiring and also its prominence in plumbing. But aside from its main uses, copper is also used in power generation and transmission, heating and cooling systems, telecommunications equipment, motors, brakes, and a number of other everyday products. As such, many feel that a play on copper can also be thought of as a play on the overall economy, or at least on the industrial sector. When it comes to yields, there are a few copper stocks that deserve a closer look.
- Southern Copper Corp. (SCCO): Southern Copper is one of the biggest miners in the industry, as the stock has a current market cap of about $26 billion. Stationed in Phoenix, SCCO is in the business of mining, smelting, and refining of copper in Peru, Mexico, and Chile. Though its dividend yield fluctuates often (usually between 8%-10%) its mouth-watering yield of 9.1% is hard to overlook.
- Freeport-McMoRan Copper & Gold Inc. (FCX): Freeport also calls Phoenix home, though its reach is more global; the company does business in regions like North and South America, Indonesia, and the Democratic Republic of Congo. Note that gold production does account for about 27% of overall business, so it is not a pure copper play. FCX, which has a market cap of $37.5 billion and an ADV topping 24 million, has a current dividend yield of 2.5%.
Crude oil has been one of the most talked about commodities as of late, with its price breaking through the triple digit barrier for the first time in months. Though it still remains volatile, with tensions rising in the Middle East, it looks like crude oil may be set to rise for the near-term future. From an investing standpoint, there may not be a more important commodity than crude. It touches just about every part of our everyday lives, as it is used in everything from gasoline and plastics, to cosmetics and industrial solvents. Crude has cast something of an invisible net over markets as many do not realize just how often we rely on the fossil fuel in our daily routine. The dividend options for this sector are numerous, but we chose three of the most prominent options.
- Transocean Ltd. (RIG): Though the company is probably still known for the Deepwater Horizon Gulf spill early last year, it has a massive upside potential for value investors. Transocean specializes in offshore drilling activities that are often difficult to reach or in harsh environments. With a number of reserves sitting at the bottom of bodies of water, RIG may have a strong future ahead. The stock (whose yield fluctuates often) is currently paying out 7.4%.
- British Petroleum PLC (BP): Another big name in last year’s spill, BP has been hard at work to restore their image. Though their stock price has not recovered to its pre-spill levels, it has certainly made some strides. Based in the U.K., BP has operations all around the world. The stock, which has a staggering market cap of over $137 billion, pays out a current yield of 3.9%.
- Kinder Morgan Energy Partners LP (KMP): This MLP is an investor favorite for its consistency and powerful name. The company operates roughly 8,400 miles of oil and gas pipelines through out the U.S. and is headquartered in Houston. KMP pays out a current yield of 5.9%, but be advised, MLPs can have some unfavorable tax treatment come April. If you are looking to avoid the headache, an ETN like AMJ might be your best bet (its yield is currently around 5.3%).
Disclosure: Jared is long BP.