Generating income seems to be all the rage these days, with interest rates at historic lows, many investors have sought other ways to get income from their portfolios, such as with dividend stocks.
However, in the quest for yield, unseen risk often lies just under the surface, waiting for some macro or micro event to expose it. It's easy to get taken in by a high yielder that has few real assets, and makes most of it's profits through leverage or excessive debt. I don't know about everybody else, but I'm not interested in getting a high yield if all of my principal has evaporated.
I think one way to lessen the risk of principal loss and still earn a decent yield is to allocate a portion of your income portfolio to mining companies that pay dividends. Miners with holdings of hard asset commodities, like aluminum, copper, iron ore, zinc, lead, silver, and gold offer investors an opportunity for diversification, inflation protection and long term growth, as well as income.
Of course, the key is to buy these companies and their assets at the right price. Overpaying for any dividend stock kills your long term return and buying the wrong mining stock, like dividend disaster Arch Coal (ACI), at the wrong price, is an almost worst case scenario.
I believe that many dividend paying mining stocks are currently undervalued due to concerns about the future of global economic growth and the demand for these commodities. Now, maybe a good time to start buying on the dips, collecting income, and waiting for the next peak in the business cycle. Here are a few to consider:
Peabody Energy Corp (BTU)
Peabody Energy is the world's largest private-sector coal company and a global leader in sustainable mining and clean coal solutions. The company serves metallurgical and thermal coal customers in more than 25 countries on six continents.
Like all coal stocks, Peabody has been challenged by global economic woes, cheap, plentiful natural gas and increased environmental regulation. However, there is a potential for a turnaround in the coal industry, since cuts in production should lead to higher prices down the road. Coal companies with strong fundamentals stand the best chance of a recovery.
The dividend has grown about 7% annually over the last 5 years. The dividend is paid quarterly.
Current Price: $25.22
52 Week Range: $22.85 - $63.08
Current P/E: 6.7
Forward P/E: 9.43
PEG: 0.44
Annual Dividend: $0.34
Yield: 1.42%
Payout Ratio: 9.0%
Cash per Share: $3.50
Beta: 1.46
Quick Ratio: 1.54
Asset Location:
United States
Australia
Commodities Produced:
Thermal Coal
Metallurgical Coal
Hecla Mining (HL)
Hecla is the largest and the lowest cash cost, primary silver producer in the U.S., with exploration properties and operating mines in four world-class silver mining districts in the U.S. and Mexico.
Hecla has taken it on the chin recently with a temporary shutdown of it's Lucky Friday silver mine in Idaho. Also, the price of silver has dropped substantially over the last year.
Hecla has an unusual dividend payment that was just instituted recently and is linked to the price of silver. The dividend is paid quarterly. The base dividend rate is $.01 annually per share. The rest of the dividend is tied to the realized silver price per ounce received in the previous quarter. It's a little confusing, but the next upcoming dividend will be $.0225 per share based on a realized price of $36.59 per ounce.
Current Price: $4.54
52 Week Range: $3.70 - $8.65
Current P/E: 11.19
Forward P/E: 16.12
PEG: 2.24
Annual Dividend: Varies based on the price of silver.
Yield: Varies based on the price of silver.
Payout Ratio: Varies based on the price of silver.
Cash per Share: $0.98
Beta: 2.03
Quick Ratio: 3.38
Asset Location:
United States
Mexico
Commodities Produced:
Silver
Gold
Lead
Zinc
IAMGOLD Corp (IAG)
IAMGOLD is a leading mid-tier gold mining company producing approximately one million ounces annually from five gold mines (including current joint ventures) on three continents. In the Canadian province of Québec, the Company also operates Niobec Inc., which produces more than 4.5 million kilograms of niobium annually, and owns a rare earth element resource close to its niobium mine.
This Canadian gold miner has more than doubled it's dividend over the last two year period. The dividend is paid semi-annually. IAMGOLD should be exempt from Canadian withholding tax if held inside a retirement account by US investors.
Current Price: $10.71
52 Week Range: $9.20 - $23.88
Current P/E: 10.7
Forward P/E: 8.52
PEG: 1.08
Annual Dividend: $0.25
Yield: 2.3%
Payout Ratio: 22.39
Cash per Share: $3.06
Beta: 0.44
Quick Ratio: 3.86
Asset Location:
Canada
Suriname
Mali
Burkina Faso
Commodities Produced:
Gold
Niobium
Rare Earths (In Development)
Bhp Billiton PLC (BBL)
We are among the world's largest producers of major commodities, including aluminum, copper, energy coal, iron ore, manganese, metallurgical coal, nickel, silver and titanium minerals, and uranium along with substantial interests in oil and gas.
Our strategy is to own and operate large, long-life, low-cost, expandable, upstream assets diversified by commodity, geography and market. Our strategy has remained unchanged for over a decade and has enabled us to deliver superior margins throughout economic and commodity cycles for many years.
Bhp Billiton is a large and well diversified commodity producer with assets all over the world. This large cap sports a 10 year history of increasing it's dividends and still has a payout ratio below thirty percent.
The company does have a substantial amount of debt, compared to the other miners listed above, but it's solid history of dividends and broad diversification make it seem like the best of this bunch.
The symbol represents an American Depository Share, whereby each share of the ADS equals two shares of the underlying common stock. The dividend has grown about 22% annually over the last 5 years. The dividend is paid semi-annually. There is no foreign withholding tax for US investors.
Current Price: $54.82
52 Week Range: $49.90 - $80.99
Current P/E: 6.45
Forward P/E: 7.46
PEG: 1.02
Annual Dividend: $2.20
Yield: 4.01%
Payout Ratio: 25.6
Cash per Share: $4.13
Beta: 1.53
Quick Ratio: 0.57
Asset Location:
Worldwide Assets
Commodities Produced:
Aluminum
Copper
Thermal Coal
Metallurgical Coal
Iron Ore
Manganese
Nickel
Silver
Titanium
Uranium
Petroleum
Natural Gas
Conclusion
Now, a word of caution about the inherent downside of the mining industry and the cyclical revenues that these companies must endure. The peak of an economic expansion is very often countered by the trough of an economic contraction. These repetitive peaks and troughs can effect every industry, but miners seem to get hit especially hard during a downturn. Volatility can be high, so it's prudent to not overload your dividend portfolio with any one company or industry.
It's also important to remember that mining stocks come in all varieties, from large, diversified and stable to small and concentrated with more risk than the general market. Any investor that is interested in the shares of a dividend paying miner, needs to look at more than just yield and payout ratio. The diversity and geographic location of their assets, debt levels, earnings growth, management's outlook toward shareholders, and the price you pay all play a role in determining whether the stock will be a winner or a loser in your dividend income portfolio.
