If you’re a seasoned income investor, you may already own a good number of typical dividend plays like utilities, consumer staples, real estate investment trusts and telecom.
Those standard dividend sectors are all well and good, but what’s popular among yield-seekers isn’t always what the broad market favors. Every sector has its ups and downs. As such, if your portfolio is over-weighted in just a handful of sectors, it could take a big hit if one bad headline triggers a sell-off.
To “volatility-proof” your portfolio, you’re going to want to diversify. The concept of diversifying might sound basic, but doing so without sacrificing yield is not always clear. So, I’m here to show you how diversifying without dropping yields is possible if you know where to look.
Here are three dividend stocks based in sectors that you might not have considered as income plays.
BlackRock Resources and Commodities Strategy Trust (BCX)
Should the Fed lose control over the long end of the yield curve, it would spark a crash in the dollar and a spike of biblical proportions in hard commodities. So, if that threat keeps you up at night, then shares of BlackRock Resources and Commodities Strategy Trust (BCX) ought to find a warm and fuzzy home in your portfolio.
BCX’s dividend stocks read like a “who’s who” of major players in energy, mining and agriculture: ExxonMobil (XOM), Chevron (CVX), BHP Billiton (BHP), ConocoPhillips (COP), Royal Dutch Shell (RDS.A), Monsanto (MON), Freeport-McMoRan (FCX), Rio Tinto (RIO), BP (BP) and Archer Daniels Midland (ADM).
BCX objectives look just like my own — income first, capital gains second. Yet, the names in BCX aren’t typically where you’d look for dividend stocks, as you’re unlikely to get more than 2%-3% income on those kinds of stocks. So, the BCX fund employs a covered call strategy (with 88% turnover) to generate its 7.6% current yield.
Even with the fund up 6.9% in the last six months, BCX is trading at a 13% discount to its net asset value. Are you kidding me? BCX is definitely one to consider if you’re looking for that winning combination of income and a commodity hedge.
PDL BioPharma (PDLI)
Royalty stream is PDLI’s bread-and-butter, and that very phrase is sweet music to income investors’ ears. Efficiently operating a company, like PDL BioPharma, that derives its income from licenses and patents requires little overhead and headcount. Furthermore, a company running on royalty stream that pays out a high yield is even more compelling.
PDL BioPharma is designed to collect royalties like a toll gate, year after year, while re-supplying the royalty pipe along the way to ensure a high yield with proven drugs in an otherwise highly-speculative sector. PDLI is biotech without all the risk and volatility that can do serious damage to a buy-and-hold portfolio.
Terra Nitrogen (TNH)
Few things are more boring than watching paint dry… or in this case, watching corn grow. However, one of the great precursors of raising grain prices is the forward pricing of nitrogen fertilizer prices. The purest play among all the corn fertilizer companies traded is undoubtedly Terra Nitrogen (TNH).
Let me entertain you with the three-year chart of corn following what is arguably the greatest two years of bumper crops on record.
America’s wealthiest commercial farmers buy future delivery of fertilizer in the teeth of a record harvest and sell it at skyrocketing prices during the next drought. Guess what — according to Farmer’s Almanac, there will be another drought. So, with Terra Nitrogen investors collecting $3.11 per share (for a fat yield of over 8%) while times are hard, imagine the payout when times are good!
Oh…and one more thing: Shares of TNH that currently trade at $150 per share during a bumper corn crop traded at $300 during drought. Therefore, income investors should be able to see why TNH is one of my go-to names; in Cash Machine, we made 18% and 118% on our two latest TNH positions after purchasing it right around the price it’s at now.
Fertilizer – and, for that matter, biotech and commodities – might not be your first thought when seeking income. But there are plenty of these “surprising” dividend plays out there…if you know how to drill down and find them. And that’s where I come in. Stay tuned for more of my favorite under-the-radar dividend picks, and I may even recommend a few of these very names to my subscribers with full buy instructions when the time is right.
Bryan Perry is the editor of Cash Machine, a newsletter focused on high-yield income investing with the goal of maintaining a blended total yield of 10% across two portfolios. Bryan is also the editor of Extreme Income, which uses the power of historically cheap money to create a leveraged “baby hedge fund” strategy that paves the way to massive profits and up to 4x greater income.