by Jeff Reeves | November 7, 2011 5:00 am
After highlighting three dividend stocks with 8%-plus yields, I noticed a trend in some of the research. Commodity stocks, while providing some of the more volatile and unreliable dividends, often held the very best dividend potential.
It’s no secret to why commodity stock dividends can fluctuate. Prices of metals, crude oil and other basic materials can change wildly from quarter to quarter — and thus the revenue and profits of these companies then change in kind. It can be very disappointing to see a commodity stock slash its dividend significantly.
Of course, it also can be a windfall when that dividend yield soars because of a 20%, 50% or even 100% dividend increase.
Obviously, dividends are important these days because high-yield stocks offer a guaranteed return on your investment even as the market stays choppy. Even if shares gyrate up and down but really don’t go anywhere, the dividends from these high-yield investments can offer significant returns. If you’re looking to invest in dividend stocks as a hedge against volatility, you might want to steer clear of high-yield stocks that do not have sustainable dividends.
But if you are bullish on commodity stocks because of rampant inflation, or if you don’t mind the risk of a volatile dividend in the pursuit of bigger yields, take a look at these three commodity stocks with big yields:
Based on its last dividend payment of 70 cents per share, Southern Copper Corporation (NYSE:SCCO) has an impressive dividend yield of 7.9%. Of course, SCCO represents the volatile dividend history of so many commodity stocks — with payouts of less than five cents per share during the depths of the downturn just two short years ago.
However, an in-depth look at Southern Copper’s dividend history shows that the worst days are behind this company on that front. Payouts continue to be robust, and the past four dividends in particular show an impressive income stream.
As for the stock itself, as a copper giant it obviously is at the whims of this base metal and its price performance. But while copper took a dive in the middle of 2011, the long-term trend remains strongly upward. Even after rolling back from its highs, copper once again is approaching the $4 mark — up about four times over since its 2008 lows.
Revenue and earnings have been creeping up in kind during the past few years and the most recent quarters. Southern Copper has posted seven straight quarters of both year-over-year revenue growth and year-over-year earnings growth. Earnings per share have grown from $1.09 in fiscal 2009 to $1.83 in fiscal 2010 to a projection of as much as $2.80 this year, according to Thomson/First Call estimates. Revenue has surged from $3.7 billion in 2009 to $5.1 billion in 2010 to a projection of over $6.9 billion this year.
See a trend?
While SCCO indeed pays a volatile dividend, and while shares have been slammed 35% year-to-date, this pick could be a bargain buy as copper prices continue to stay strong. If and when the industrial recovery occurs, expect this pick to soar.
Vale (NYSE:VALE) is a Brazil stock that focuses on basic metals like iron, copper and aluminum, as well as some agricultural chemicals and gold mining. I recently wrote a whole story on why Vale stock is a buy due to strong fundamentals and a good outlook, but I barely even covered the high-yield dividend potential of this pick!
And if you don’t want to read my full opinion on why Vale stock is a buy, just consider these quick facts: First-quarter revenue in fiscal 2011 almost doubled for Vale, from just shy of $7 billion to $13.8 billion. Second-quarter revenue was up “only” 50%, from $10.3 billion to $15.7 billion.
We covered the copper picture with SCCO. But the aluminum price trends also are hot, doubling the lows seen in the recession. And hopefully I don’t have to tell you how impressive gold has been during the past few years.
This commodity stock also is a dividend payer of note. Based on its last quarterly payment of 37 cents per share, Vale has an annualized yield of 5.8%. Of course, that dividend is volatile — ranging from 19 cents to as much as 58 cents in the past few quarters. The dividend also can be unreliable, since Vale only paid two dividend payments for all of 2010.
However, the impressive growth ahead of this company in both earnings per share and revenue implies that future payouts will be frequent and robust. Vale’s dividend could be less than 37 cents a share in December — but it also could be significantly more than that.
Companhia Siderurgica Nacional (NYSE:SID) is another hot emerging-market metals stock. SID is a great way to play the commodities boom and a great way to tap into big dividends.
Revenue definitely is on the upswing, with seven consecutive quarters of year-over-year sales growth. Companhia Siderurgica Nacional has seen revenue go from $5.5 billion in fiscal 2009 to $8.2 billion in 2010 to projections well over $10 billion this year. Earnings per share also have steadily increased, from 90 cents in 2009 to 98 cents in 2010 to projections of more than $1.50 this year.
The tricky thing about SID stock, however, is its volatile annual dividend. Unlike other quarterly dividend payers, the dividends from this stock come once every 12 months — and that payout can fluctuate significantly. Based on the 81 cents paid earlier in 2011, investors can expect a yield of about 8.5% in the spring. But again, that’s just an assumption.
After all, when the company seemed to be recovering nicely in 2010 with stronger sales and a firm share prices, the dividend was much less impressive. There really are no guarantees with SID’s dividend.
However, the growth of the company is an encouraging sign. Also, the ex-dividend date typically is in the spring, so there’s plenty of reason to bide your time and wait to see if the market or the broader economic picture changes the fortune of this steelmaker.
But remember that the 8.5% yield is not only based on that projected dividend but the current cost. If SID shares march up significantly, the yield will naturally decrease in kind.
Jeff Reeves is the editor of InvestorPlace.com. Write him at firstname.lastname@example.org, follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook. As of this writing, he did not own a position in any of the aforementioned stocks.
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