Coal Fires Up Top Yield 'Safe' Basic Materials Dividend Dogs For February

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Includes: AHGP, ARLP, BAK, CINR, CNXC, EVA, NRP, OCIP, SXCP, TNH
by: Fredrik Arnold

Summary

27 of 50 Basic Materials stocks pay dividends deemed "safe" because their reported free cash flow yield exceeds dividend yield. Those 27 possess sufficient margin to pay their dividends.

Top 10 "safe" February Basic Materials Sector yields by OCIP, NRP, CINR, AHGP, ARLP, BAK, TNH, EVA, CNXC, SXCP ranged from 4.06-14.44%. Free cash flow yields ranged from 5.86-34.61%.

Besides their safety margin, Basic Materials sector dogs also reported payout ratios (lower is better), total annual returns, and dividend growth as of January 31 to provide more safety guidance.

Broker targets revealed ten top yield safe Basic Materials Sector stocks, with 49.24% more gain from $5k invested in the lowest-priced five than from $5K invested in all ten.

The Dividend Dogs Rule

The "dog" moniker was earned by stocks exhibiting three traits: (1) paying reliable, repeating dividends, (2) their prices fell to where (3) yield (dividend/price) grew higher than their peers. Thus, the highest-yielding stocks in any collection became known as "dogs". More specifically, these are, in fact, best called, "underdogs".

What Basic Materials Industries Show Up As "Safe"?

Basic Materials sector industries listing cash margins greater than their announced annual dividends include ten of thirteen YCharts-listed industries. The industry representation from the listed firms broke out thus: coal (5); lumber & wood production (2); agricultural inputs (2); chemicals (4); industrial metals (3); specialty chemicals (5); steel (2); paper & paper products (2); aluminum (1); and building materials (1).

Top ten Basic Materials sector dogs showing the biggest dividend yields by this screen as of January 31 represented five industries: (1) coal was represented by five stocks; (2) lumber and wood production had one; (3) agricultural inputs had one; (4) chemicals had two representatives; and (5) industrial metals had one stock.

27 Basic Materials Sector Firms Showed Enough Free Cash Flow to Cover Dividends

Periodic Safety Check

A previous article discussed the attributes of these 50 Basic Materials stocks from which those twenty-seven tinted light green were sorted. You see below the list that passed the dividend "stress" test. These 27 Basic Materials dogs report sufficient annual cash flow yield to cover their anticipated annual dividend yields. The margin of excess is shown in the boldfaced "Safety Margin" column.

Financial guarantees, however, are easily overruled by a cranky board of directors or company policy canceling or varying the payout of dividends to shareholders. For example, Terra Nitrogen Co. (NYSE:TNH) pays a variable semi-annual dividend to suit its cash flow. Alliance Resource Partners (NASDAQ:ARLP) on the list below pays a variable quarterly dividend that has ranged from $.675 to $.438 over the past year. Also, Natural Resource Partners (NYSE:NRP) slashed its dividend after 2013 and twice in 2015. Most recently, NRP cut a $0.90/Q dividend to $0.45 in November 2015.

Three additional columns of industrial data listed after the Safety Margin figures reveal payout ratios (lower is better), total annual returns, and dividend growth levels for each stock. This data is provided to reach beyond yield to select well-supported payout stocks.

Dog Metrics Recovered 5 Low-Price Bargains In Basic Material "Safe" Stocks

Ten "safest" top Basic Materials firms that showed the biggest yields as on January 31 per YCharts data ranked themselves by yield as follows:

Actionable Conclusions: (1) Analysts Expect 5 Lowest-Priced of "Safe" Ten High Yield Basic Material Sector Dogs to Deliver 14.57% Vs. (2) 9.76% Net Gains from All Ten by February 2018

$5000 invested as $1k in each of the five lowest-priced stocks in the "safe" ten Basic Materials kennel by yield were determined by analyst 1-year targets to deliver 49.24% more net gain than $5,000 invested as $.5k in all ten. The second-lowest priced safe Basic Materials dog, SunCoke Energy Partners (NYSE:SXCP), showed the best net gain of 34.02%, per analyst targets.

The five lowest-priced "safe" Basic Materials dogs as of 1/31/17 were: OCI Partners (NYSE:OCIP); SunCoke Energy Partners; CNX Coal Resources (NYSE:CNXC); Braskem S.A. (NYSE:BAK); and Alliance Resource Partners, whose prices ranged from $9.35-23.80.

Five higher-priced safe Basic Materials dogs as of 1/31/17 were: Enviva Partners (NYSE:EVA); Alliance Holdings GP (NASDAQ:AHGP); Ciner Resources (NYSE:CINR); Terra Nitrogen Co.; and Natural Resource Partners, whose prices ranged from $25.90-113.00.

This distinction between five low-priced dividend dogs and the general field of ten reflects the "basic method" Michael B. O'Higgins employed for beating the Dow. The added scale of projected gains based on analyst targets contributed a unique element of "market sentiment" gauging upside potential. It provided a "here and now" equivalent of waiting a year to find out what might happen in the market. It's also the work analysts got paid big bucks to do.

Caution is advised, however, as analysts are historically 20-80% accurate on the direction of change and about 0-20% accurate on the degree of change.

The net gain estimates mentioned above did not factor in any foreign or domestic tax problems resulting from distributions. Consult your tax advisor regarding the source and consequences of "dividends" from any investment.

See my instablog for specific instructions about how to best apply the dividend dog data featured in this article and this instablog to aid your safe investing.

The stocks listed above were suggested only as possible starting points for your safest Basic Materials dog dividend stock research process. These were not recommendations.

Five of these basic materials sector dividend pups qualify as valuable catches! Find them as five of the now 77 Dogs of the Week found in two portfolios on The Dividend Dog Catcher premium site. Click here to subscribe or get more information.

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Disclaimer: This article is for informational and educational purposes only and should not be construed to constitute investment advice. Nothing contained herein shall constitute a solicitation, recommendation or endorsement to buy or sell any security. Prices and returns on equities in this article except as noted are listed without consideration of fees, commissions, taxes, penalties, or interest payable due to purchasing, holding, or selling same.

Graphs and charts were compiled by Rydlun & Co., LLC from data derived from ycharts. com; finance.yahoo.com; analyst mean target price by Thomson/First Call in Yahoo Finance. Dog photo from: johnsonsofpikeville.com

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within 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.