Revisiting A Basic Materials Top 10 Dividend Stock List

by: Bennington Investment Ideas

Basic materials stocks had a tough year in 2011. As the early euphoria of economic recovery gave way to gloom over European countries and declining economic prospects, markets declined as a whole and basic materials suffered even more from early Spring. In February, I assembled a list of ten basic material dividend stocks. Since that time, they have slightly outperformed the broader market as measured by the SPDR S&P 500 Trust ETF (NYSEARCA:SPY) and significantly outperformed two broad basic materials ETFs, Materials Select Sector SPDR (NYSEARCA:XLB) and iShares Dow Jones US Basic Materials (NYSEARCA:IYM). My proposed portfolio of basic materials dividend stocks was:

February 2011 Top Ten Basic Material Dividend Stocks
Ticker Company Name Industry Current Forward Dividend Yield
CLMT Calumet Specialty Products Partners Oil & Gas Refining & Marketing 10.1%
SID Companhia Siderurgica Nacional Steel & Iron 10.0%
PVR Penn Virginia Resource Partners Industrial Metals & Minerals 7.9%
TNH Terra Nitrogen Company, L.P. Agricultural Chemicals 8.5%
OLN Olin Corporation Chemicals 4.0%
AHGP Alliance Holdings GP LP Nonmetallic Mineral Mining 4.4%
NL NL Industries Synthetics 3.8%
DD EI DuPont de Nemours & Co. Chemicals 3.6%
COP Conoco Phillips Major Integrated Oil & Gas 3.8%
NUE Nucor Corporation Steel & Iron 3.7%
Forward dividends based on December 29th closing prices and author's estimate for forward dividends. Historical dividends for TNH and SID were used to approximate the forward dividend.

The following table shows the performance to date as well as that of key benchmarks.

Performance of Select Basic Materials Stocks


Price at February 11 Dividends since 2/11 Price at December 29 Return
SPY 133.11 2.58 126.12 -3.3%
XLB 39.85 0.74 33.52 -14.0%
IYM 79.58 1.43 64.21 -17.5%
CLMT 22.7 1.47 19.86 -6.0%
SID 16.52 0.81 8.07 -46.2%
PVR 26.82 1.47 25.54 0.7%
TNH 117.11 13.91 163.70 51.7%
OLN 18.75 0.60 19.78 8.7%
AHGP 54.21 1.14 52.30 -1.4%
NL 14.26 0.50 13.18 -4.1%
DD 54.58 1.23 45.85 -13.7%
COP 71.58 2.64 72.87 5.5%
NUE 47.81 1.09 39.59 -14.9%
Average NA NA NA -2.0%

Source: Yahoo!Finance for closing prices and dividends.

While on average these stocks declined, their declines were slightly less than the S&P 500 and significantly better than the two basic material ETFs. I had also revisited this list back in April of 2011. The suggestion at that time was to swap OLN with Total SA (NYSE:TOT). I also expressed concern about SID, but did not suggest a replacement. The replacement of OLN with TOT would have been beneficial since TOT only declined 11.6% from April 21 through December 29 while OLN dropped a more substantial 21.6%. In comparison SPY declined just 4.2%. These returns include the benefit from dividends received.

The other obvious observation is that returns varied highly among the selections. The exclusion of TNH or SID would have substantially altered the average return. The initial list of stocks was selected for dividend potential, but also to cover multiple industries within basic materials.

The final observation is about benchmarking. While it is nice that these stocks outperformed the market as a whole, they substantially outperformed two basic materials ETFs which is probably more important. However, XLB appears to be tilted more towards chemicals, with DD as its largest holding at over 10% and other leading chemical companies in its top ten. XLB is also focused on U.S. companies, so stocks like SID and TOT would not even be considered. Furthermore, at an industry level, my portfolio of ten dividend stocks represented a different profile of industries than either benchmarking ETF.

Looking forward to 2012...

In addition to replacing OLN with TOT, I would probably look at some additional changes. The first observation is that some of these companies are actually partnerships and so have different tax and accounting implications. A couple of these companies also offer relatively flat dividends - DD and NL have not raised their dividends in several years. This would be automatic disqualification for dividend-growth investors. I would replace SID with Southern Copper Corporation (NYSE:SCCO). Looking towards the future as the global economy recovers, SCCO should benefit. However, SCCO is driven primarily by copper which is substantially used in construction, both buildings and power generation infrastructure. Its secondary uses are in electronics and equipment manufacturing.

Tilting away from chemicals and towards energy, I would look at replacing NL and DD with drilling companies. One could consider SeaDrill Limited (NYSE:SDRL) and Transocean Ltd (NYSE:RIG). RIG offers an estimated forward dividend yield of 8.2%, but the glaring caveat is that RIG has paid a meaningful dividend for just the last three quarters. It is unclear how much longer this trend would continue. RIG is moving into deep water drilling. SDRL is another option and is much more focused on deep water drilling. Using its most recent quarterly dividend, SDRL would have a forward yield of 9.0%.

One final area to consider would be paper and timber products. Weyerhaeuser Company (NYSE:WY), Plum Creek Timber Company (NYSE:PCL) and Rayonier Inc. (NYSE:RYN) all offer forward dividend yields above 3.0%. PCL offers a 4.5% dividend yield; however, they also have not increased their dividend in several years. The level of home construction is a significant driver of revenue for timber companies. Furthermore, housing starts have shown significant positive news recently. Both RYN and PCL are organized as REITs, which is common for timber companies.

Basic materials stocks are primarily driven by global macroeconomic conditions, resulting in either larger or smaller than expected demand for their products. When global economic growth is stronger than expected, basic materials stocks should do well. Concern over continued strength in the Chinese economy and in particular weakening in construction activity could adversely impact many of these companies through declining commodity prices. These names can be used as a starting point for further research.

Disclosure: I am long SPY.

Additional disclosure: 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.