By Jared Cummans
Commodity investing has been extremely popular in recent years as investors have discovered the benefits that these investments can offer for an individual portfolio. Exposure to commodities offers benefits like low correlation, inflation hedges, and also heavy exposure to some of the world’s fastest growing markets. But there is still something of a disconnect between income investors and commodities, as these investments are typically seen as growth plays or simply left for active traders. But those who overlook commodity stocks with even mediocre yields could be missing out [see also Dividend Special: Top Companies In Every Major Commodity Sector].
At first glance, it can be easy to overlook dividend yields when making investment decisions. For example, seeing a 2% yield on a stock may seem minuscule, but consider this; a portfolio with a baseline investment of $100,000, earning an average 2% annually off of dividends will appreciate to approximately $122,000 in 10 years, and nearly $150,000 in 20 years, assuming the gains are re-invested and no appreciation in stock price. In fact, a recent study conducted by Standard & Poor’s revealed that dividend components were responsible for 44% of the total return in the last 80 years of the S&P 500′s history. From 1950 until 2010, an investment of one dollar with dividends and reinvestment would have performed eight times better than a dollar invested in a non-dividend security; that dividend invested dollar would be worth roughly $500 today [see also Dividend Special: Four Commodity Stocks Yielding Over 5%].
Dividends can also be used as a partial hedge in bear markets. For instance, the last 10 year have been coined “The Lost Decade” for the U.S. stocks, as equities finished lower at the end of 2009 than they began in 2000. The S&P 500 returned -2.7% in the 2000′s, the worst decade in over 50 years. But, the average dividend distribution for the 2000′s was 1.8%, cutting losses from -2.7% to just -0.9%. And in decades where average stock prices rose (which is every decade from 1950 until 2000), gains are only furthered by strong dividends. Simply put, dividends provide stability even when markets stumble [see also Three Commodities Dividend Lovers Must Own].
With both dividends and commodities offering a laundry list of benefits on their own, combining the two makes for one powerful investment strategy. Below, we outline 12 commodity stocks with strong dividends to prepare your portfolio for the coming year:
1. Alerian MLP Index ETN (AMJ)
MLPs have become ultra-popular dividend options as they typically offer juicy yields. But owning individual MLPs can be dangerous and can also have adverse tax effects come April. This ETN tracks an index created to provide a comprehensive benchmark for investors to track the performance of the energy MLP sector. As an ETN it will not incur tracking error and will not issue a K-1 to its investors. Note that it will be at the credit risk of its issuer, but considering that JP Morgan is the name behind the fund, investors don’t have a whole lot to worry about.
Top holdings of this product include Enterprise Products, Enbridge Energy, and investor favorite Kinder Morgan. The fund has a market cap topping $3 billion and an average daily volume over one million, making it one of the most popular funds on the market. What may be most impressive about this fund is that it has returned over 8% for investors this year while many other equities have been in the gutter. Finally, AMJ has a current yield of 5.17%; while that may be on the lower end of MLP standards, consider the diversification benefits and safety that this ETN offers.
2. Alumina Ltd. (AWC)
Alumina is an Australian-based company that mines bauxite, refines alumina, and smelts aluminum. The company has a 40% equity interest in Alcoa World Alumina, a joint venture with Alcoa, and is one of the most powerful names in the aluminum industry. With control of about 17% of the world’s alumina market, it is no surprise to see AWC as one of the biggest names on the ASX (note that it is cross-listed on the NYSE). For those who are unfamiliar, alumina is simply aluminum oxide, the key component in aluminum production.
As far as the stock is concerned, AWC is sporting a market cap of $3.4 billion with a decent daily volume that falls just below 350,000. Its current P/E ratio of 58.44 may be a turn off for some, but it comes with a healthy dividend yield. AWC currently pays out a yield of 4.1% and makes for a strong play on the aluminum market in the coming year.
3. BP Prudhoe Bay Royalty Trust (BPT)
BPT is a branch of British Petroleum that is stationed in New York City. The company operates as a royalty trust and has major assets inf the Prudhoe Bay Oil Field, which is the largest in North America. In total, the field covers over 213,000 acres and had originally held somewhere around 25 billion barrels of crude. In fact, its size doubles the next biggest oil field on the continent, making BPT a prime target to play one of the most important oil sources in the world. The stock was listed as one of the top four dividend payers from 1997-2007 by the Motley Fool and over that time period gained approximately 1,369% for its very fortunate investors.
The stock itself has a market cap of $2.5 billion with a healthy EPS of $9.46. Note that BPT trades less often than most of the options on this list, with an ADV just over 93,000, but some investors may be looking for a more stable fund that does not have issues with active traders becoming market makers. BPT, most importantly, is paying out a current yield of 6.9%, adding a handsome income stream to any investment portfolio.
4. ConocoPhillips (COP)
One of the six “supermajor” oil companies around the world, ConocoPhillips formed as a result of the 2002 merger between Conoco Inc. and Phillips Petroleum Company. Stationed in Houston, the company is home to nearly 30,000 employees and has operations that span over roughly 40 countries. It is the second-largest U.S. refiner and has the domestic capacity of about two million barrels per day. Aside from its crude exploration and production, the firm also has significant operations based in natural gas-based products as most major oil companies are known to do.
COP has a current market cap just shy of $100 billion and a ADV of 9.4 million, making it a strong large cap play for your portfolio. The stock has a payout ratio of just 32%; a much more sustainable figure then some of the the other options on this list. For those looking for a steady yield, COP’s 3.6% payout looks to be a rock-solid bet for years to come.
5. Devon Energy Corporation (DVN)
Devon focuses its operations on natural gas and is one of the largest processors on the continent. Based in Oklahoma City, the company focuses its operations and pipelines in North America, making it a play on economies close to home. DVN ranks as a Fortune 500 company and is home to over 5,000 employees. The stock is a bit smaller than some of the other options, with a market cap of $27 billion, but it still has a healthy ADV of nearly four million. Note that other than a slight miss last quarter, Devon has had strong earnings management which bodes well for the stock in the long run.
DVN has a current dividend yield of 1%, and while that makes it one of the smallest on this list, it is not without its upside. Devon has a current payout ratio of just 6%, leaving plenty of room for dividend growth in the coming years as the natural gas market is only predicted to expand from here on out.
6. Market Vectors Junior Gold Miners ETF (GDXJ)
This ETF tracks an index which provides exposure to a global universe of publicly traded small and medium-capitalization companies that generate at least 50% of their revenues from gold and/or silver mining. The fund, which charges 0.56% in expenses, is home to over 75 securities that are based around the world. In fact, GDXJ features a U.S. allocation of just 1.5%, the majority of its holdings lie in Canada and Australia, a noteworthy exposure for investors. Though the fund focuses on small cap holdings, it should come as a sigh of relief that the majority of them are based in developed and stable economies. Top holdings in the fund include Alamos Gold, AuRico Gold, and Silvercorp Metals.
The fund is another member of the billion dollar club, with total assets coming in around $2.3 billion and a healthy trading volume of 3.2 million to make for one of the most popular and liquid ETFs on the market. But of course, the most important factor to consider is GDXJ’s robust dividend yield. The fund is currently paying out a SEC 30 day yield of 9.72%. Though the fund is quite volatile and suffered a rough 2011, its low price and high yield make it an attractive play for the year.
7. Monsanto Co. (MON)
Monsanto is one of the biggest names in the agribusiness sector and has their hands in a wide variety of household products. They are the world’s leading producer of herbicide glyphosate, a weed-killer most commonly seen in the product “Roundup”. But the company is also well known for their production of genetically engineered seeds as they supply roughly 90% of the entire U.S. market. With a stranglehold on a relatively popular market, many investors feel that Monsanto is a great long-term play for a portfolio.
The stock features a market cap of $38 billion with a P/E of 24; a little high for some investors. The stock, which is 80% held by institutions, has featured healthy revenue growth as of late with a large amount of cash to cover any emergencies or illiquidity issues they may have. MON has a solid set of key financials and tops it all off with a nice yield of 1.7%.
8. Plum Creek Timber Co. Inc. (PCL)
Founded in 1989, Plum Creek is the largest private landowner in the states with its headquarters in Seattle. It is important to note that the fund is a REIT, which can turn off some investors immediately as these securities carry their own set of risks. The firm manages timberlands while producing products like plywood, fiberboard, and a number of other wood-based goods. With a market cap of $5.9 billion, PCL is one of the smallest companies on the list, though it is still relatively large by market standards.
The stock itself features a ADV of 1.6 million with strong quarterly earnings and revenue growth. It should be noted that over 8% (roughly $13M shares) of its shares are currently held short, meaning that there is a pretty significant audience out there that believes this stock will fail. A bet on PCL can also be thought of as a bet on the construction industry which has faced notable headwinds over the year, but with the economy showing some signs of brightness, PCL could be in for a strong 2012. The stock has a current yield of 4.7%, making it one of the better income options on the list.
9. PetroChina Co. Ltd. (PTR)
PetroChina is currently the third largest company in the world, with only Apple and Exxon Mobil beating their figures. The firm is the largest oil producer in China and its stock is traded in Hong Kong, New York, and more recently in Shanghai. Though stationed in Beijing, its cross-listing on three powerful exchanges made PetroChina the first company to ever reach a trillion dollar market cap. The company has had a rough year, but with a firm grasp on the world’s largest country, its growth prospects for the coming years remain strong.
The stock has a relatively low ADV of just 240,000, but a healthy P/E of 10.3 to accompany it. Its vital stats seem pretty stable, with strong earnings and revenue growth as well as a fair amount of cash on hand. PTR pays out a dividend yield of 3.5% and figures to be a nice blend of income and growth for the future.
10. 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 income investors. Transocean specializes in offshore drilling activities that are often in difficult to reach or harsh environments. With a number of reserves sitting at the bottom of bodies of water, RIG may have a strong future ahead. The Swiss firm is home to nearly 140 offshore drilling rigs and has several ultra-deep platforms currently in the works. Transocean has a strong global reach, with offices and operations reaching nations like Norway, Scotland, Brazil, Malaysia, and others.
RIG has a market cap of $14.5 billion and trades roughly 7.1 million shares each day. With its stock still below its pre-spill levels, a number of investors may see RIG as a cheap option in today’s market environment. The company pays out a juicy yield of 6.9%, thought that number has recently fluctuated between 7% and 8%.
11. Southern Copper Corp. (SCCO)
Southern Copper is one of the largest publicly traded copper miners in the world. The company is majority owned by Mexican conglomerate Grupo Mexico and aside from being one of the leading copper producers, SCCO is also one of the primary producers of molybdenum, zinc, silver, lead, and gold. Its primary operations are based in Mexico, Peru, and Chile, where the aforementioned commodities are found in plentiful supply. Though the company does most of its business in emerging markets, it is important to note that it is based in Phoenix, so it is not fully exposed to unstable economies.
SCCO has a current market cap of about $26.4 billion, but many investors are more concerned with its recent performance. The stock has been on a downward trend for the last year, losing 36.4% since its highs in January, losses that have not been offset by its dividend yield. SCCO has a massive 8.9% yield that has the potential to be a major plus to your portfolio, but its recent performance is certainly something to keep in mind before investing.
12. Silvercorp Metals Inc. (SVM)
Based in Vancouver, Silvercorp focuses on the exploration and development of lands with silver deposits. The company is the largest silver producer in China, as it focuses a good portion of its business there, though it is still a major force in Canada. Aside from its hefty silver production, Silvercorp also has mines that are focused on lead and zinc, giving it a diversified spread across the metals industry. Note that as a mining firm, SVM will likely be more volatile than silver prices given the fact that most miners present something of a leveraged play on their underlying products.
SVM comes in looking quite small in comparison to the rest of this list, with a market cap of just $1.2 billion. But its 5.5 million shares traded daily ensure that is is still quite popular among investors looking to get silver exposure. The fund, as expected, features a relatively high beta of 1.62 and has lost nearly 43% in the trailing year. With silver prices enduring a rough year, it comes as no surprise to see SVM struggle, but this may create an opportunity for the coming year. SVM pays out a nice dividend yield of 1.3% and while it cannot match some of the other payouts on the list, silver’s battered position makes SVM an enticing play.
Disclosure: Jared is long BP.