These five stocks are U.S. S&P 500 basic materials companies with market caps of 2 billion or better which pay dividends yielding 3% or more. Furthermore, these companies have great stories, positive catalysts for future growth and solid fundamentals. Some have been pushed lower by recent negative comments by analysts and present a buying opportunity in my opinion.
This may be a good point to start a position in these high-yield dividend-paying opportunities for two reasons. These dividend-paying stocks have the potential for both capital gains and income production. With central banks across the globe playing a game of catch-as-catch-can regarding the competitive devaluation of their currencies, these basic materials names should benefit from a reflationary trend. The combination of potential capital gains and income production makes these stocks attractive for the long run.
In the following sections, we will perform a review of the fundamental and technical state of each company to determine if this is the right time to start a position. The following table provided by Finviz.com depicts summary statistics and Wednesday's performance for the stocks.
Cliffs Natural Resources Inc. (CLF)
The company currently pays a dividend with a yield of 6.40%. The company is trading 49% below its 52-week high and has 36% upside potential based on the consensus mean target price of $53.13 for the company. Cliffs was trading Wednesday for $39.09, slightly up for the day.
Fundamentally, Cliffs has several positives. The company has a forward P/E of 5.83. Cliffs is trading for 88% of book value. EPS next year is expected to rise by 28%. The company has a net profit margin of 24.43%. The company has an ROE of 24.31%.
Technically, Cliffs is definitely still in a long-term down trend. Nonetheless, all the major moving averages are starting to change the angle of decent and flatten out somewhat. The stock is cooling off from a recent spike off the 52 week low of $32 on heavy volume at the beginning of September. Cliffs' beta is 2.34.
The company is down over two-fold from its 2008 high of $110. The stock recently bounced off a multi-year low and has moved substantially higher smashing through the 20 and 50 day smas only to give half the gains back in recent days. The turmoil in Spain has many taking profits as the third quarter comes to a close. The significant dividend yield combined with the fact the stock is near 52 week lows makes this a buying opportunity in the name. Yes, this stock is currently out of favor. Counter intuitively, that is exactly the time to buy. If you want to reduce risk further, wait until earning due out on October 22nd.
COP pays a dividend yielding 4.63%. The stock is trading down 3% from its 52 week high and has 10% upside potential based on the consensus mean price target of $62.47. COP was trading Wednesday for $57.01, down nearly 1% for the day.
The company has many fundamental positives. COP has a forward P/E ratio of 9.59. COP is trading for 1.5 times book value. The company has a net profit margin of 10.55%. ConocoPhillips plans to achieve growth by focusing on high margin production. The company plans to reinvest cash flows to achieve organic reserves replacement of over 100%.
The stock has been in a well-defined uptrend since the start of June. The stock has pulled back to approximately 1% above the 50 day sma and is near the bottom of the current uptrend channel. I see the recent pullback as a buying opportunity.
Chevron Corporation (CVX)
Chevron pays a dividend yielding 3.10%. The stock is trading down 2% from its 52 week high and has 5% upside potential based on the consensus mean price target of $122.18. Chevron was trading Wednesday for $116.30, down nearly 1% for the day.
The company has many fundamental positives. Chevron has a forward P/E ratio of 9.30. Chevron is trading for 1.76 times book value. The company has a net profit margin of 10.79%. Chevron's EPS is up 47% this year. The ROE is 21.68%.
The stock has been in a well-defined uptrend since the start of June. The stock has pulled back to approximately 4% above the 50 day sma and is currently still in an uptrend. The stock is up 28% for the year. Chevron is a solid performing low beta stock.
With the Eurozone crisis coming to the fore recently, the Euro has taken a dive driving the dollar higher and consequently, dollar denominated commodities such as oil lower. Use this weakness as a buying opportunity.
E. I. du Pont de Nemours and Company (DD)
DD pays a dividend yielding 3.41%. The stock is trading down 5% from its 52 week high and has 12% upside potential based on the consensus mean price target of $56.36. DD was trading Wednesday for $50.50, up slightly for the day.
The company has many fundamental positives. DD has a forward P/E ratio of 11.15. The company has a net profit margin of 8.66%. DD's ROE is 31.53%.
The stock has been in a well-defined uptrend since the start of July. The stock is up over 235 over the past 52 weeks, yet has pulled back to 4% to just above the 50 day sma and is near the bottom of the uptrend channel.
Any pullback in the stock is a buying opportunity. With the recent droughts and various weather events across the globe driving crop prices higher, the demand for DD's product will only rise. Moreover, the recent QE programs being implemented by central banks should provide support for the stock as well.
Freeport-McMoRan Copper & Gold Inc. (FCX)
Freeport pays a dividend yielding 3.18%. The company is trading 18% below its 52-week high and has 24% upside potential based on the consensus mean target price of $48.89 for the company. Freeport was trading Wednesday for $39.28, down slightly for the day.
Fundamentally, Freeport has several positives. The company has a forward P/E of 8.18. Freeport is trading for 2.25 times book value. EPS next year is expected to rise by 42.86%. The company has a net profit margin of 21.98% and an ROE of 20.38%.
Technically, Freeport has been in a well-defined uptrend since mid-June. The stock went parabolic after the Fed announced a new round of QE was forthcoming. The recent pullback is healthy for the stock technically.
This is an ideal time to start a long-term position in Freeport. They are big producers of both copper and gold. The company is down significantly from its all-time highs and has reacted well in periods where QE has been implemented. The stock is a buy here if you have a long term time horizon.
The Bottom Line
These stocks have solid long-term growth stories and pay hefty dividends. These facts coupled with the Fed's announcement that rates will remain at ultra-low levels for at least the next two years leads me to believe these stocks are a better hedge against inflation than fixed income instruments such as bonds and CDs. Factor this in with the statistic that historically dividend-paying stocks have outperformed non-dividend-paying stocks and you have a recipe for outstanding returns.
We are talking about buying and holding these stocks for over five years. Some may say that this means the entry point means little. I say that is nonsense. Since these will be long-term core portfolio holdings, take your time and build your full position slowly. If you choose to start a position in any stock, I suggest layering in a quarter at a time at a minimum to reduce risk.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in DD, FCX, CLF, CVX, COP over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This is not an endorsement to buy or sell securities. Investing in securities carries with it very high risks. The information contained within this article for informational purposes only and is subject to change at any time. Do your own due diligence and consult with a licensed professional before making any investment decisions.