Investors love the steady income that comes from owning a dividend stock. You get to watch your investment appreciate in value over the long-term and collect quarterly cash payments. A well-established and well-disciplined dividend portfolio can be a valuable asset for any investor. Of course, that's easier said than done. Where do you find great companies with sustainable dividends? Well, perhaps you should look to the fertilizer industry.
Leading diversified fertilizer producers PotashCorp (POT) and Mosaic (MOS 0.26%) pay respectable and steady dividends. There are risks, as with any investment or industry, but the importance of and demand for fertilizers will only increase in coming years. Let's take a quick detour to illustrate that point.
Fertilizer demand is trending in one direction
The world's population is growing, which will create the need for more food production, which will create the need for more fertilizer production. The U.S. Department of Agriculture and Mosaic estimate that the world will need 4% more farmland and 21% better yields to produce enough food by 2030.
The trend is your friend. Source: Mosaic.
In other words, companies such as PotashCorp and Mosaic will be heavily leaned on by the world's agricultural industry in the next 20 years. Can income investors count on these companies, too?
Diversified players
PotashCorp is the world's largest fertilizer producer by capacity for all three nutrients (nitrogen, potassium, and phosphorus), while Mosaic is the world's largest producer for combined potassium and phosphorus capacity. Each company's size may reduce its flexibility to respond to sudden, knee-jerk market developments -- as happened last July -- but size also has its advantages.
The biggest advantage is stability, which is a top priority for income investors. Stability has allowed PotashCorp to increase its dividend by 950% since the fourth quarter of 2010 and to enact a stock repurchase plan that has reduced share count by 3.5% since July 2013.
Source: PotashCorp.
Stability has allowed Mosaic to return 38% of its capital allocations to shareholders since July 2012, while still focusing on infrastructure improvements, organic growth projects, and strategic acquisitions.
Source: Mosaic.
Stability allows PotashCorp to deliver a dividend yield of approximately 3.8% and affords Mosaic the ability to offer shareholders a 2% yield. You like stability.
Which stock can you count on?
The last five years have been rough for shareholders counting on diversified fertilizer stocks for steady income. The industry's momentum came to a grinding halt when an overabundance of production from China and long-term expansion projects flooded the market, which stymied selling prices and wiped away any hopes for short-term growth. Simply put, PotashCorp and Mosaic were counting on a radically different market to ease the pain from massive capital expenditures.
POT Total Return Price data by YCharts.
However scary that chart appears, it's misleading for several reasons. The largest being the fact that it's a very short-term glimpse at the remarkable long-term performance turned in by diversified fertilizer stocks. In any short-term period, larger players such as PotashCorp and Mosaic will be penalized for spending significant amounts of money on capital expenditure projects. The benefits from expansion projects only become apparent when considered on longer-term horizons. For example, In the last 10 years, PotashCorp and Mosaic have yielded total returns of 735% and 332%, respectively.
POT Total Return Price data by YCharts.
Both companies have completed nearly all their planned major expansion projects, which will be reflected by record operational efficiency in the years ahead. There will be still be headwinds, such as increased exports from China, but lowering production costs will help the companies fight those threats head-on. Given the long-term trends in fertilizer demand and operational efficiencies that will begin to appear in the coming quarters, I think both PotashCorp and Mosaic are great additions for stable and reliable income.
