Agriculture stocks aren't really popular among income investors, and at first glance, there appear to be decent reasons as to why. Agriculture is, after all, an incredibly boring business, subject to classic economic cycles. Boring, however, can be beautiful sometimes; and there's one solid reason why you should look at agricultural dividend stocks if you still haven't: Farming companies are helping the world tackle one of its biggest challenges of feeding a growing population even as arable land shrinks.
In other words, you can't possibly go wrong investing in stocks that are addressing a key global challenge. Today, most agriculture stocks pay a dividend and offer good yields. Here's a quick list of some of the highest-yield stocks in agriculture:
- Terra Nitrogen (NYSE:TNH): 7.47%
- CVR Partners: 5.29%
- CF Industries (NYSE:CF): 4.16%
- Mosaic Company: 4.15%
- Agrium Inc. (NYSE:AGU): 3.64%
- Archer Daniels Midland (NYSE:ADM): 3.02%
- PotashCorp (NYSE:POT): 2.32%
- Bunge Ltd: 2.19%
- Deere & Company: 1.94%
- Monsanto: 1.85%
- DuPont: 1.81%
Among these, the following dividend stocks make for compelling buys thanks to their strong dividend history and growth potential.
Archer Daniels Midland: The best of the lot
If you're on the lookout for steady and growing dividends, Dividend Aristocrats -- an elite group of stocks that have raised their dividends for at least 25 straight years -- are arguably the best you can find. Guess what? Only one agriculture stock has made it to the league – Archer Daniels Midland.
ADM processes agricultural commodities like corn and oilseeds into food, feed, and fuel ingredients and distributes them to diverse industries. Given the commoditized nature of agribusiness, it's pretty incredible that ADM has been able to reward shareholders with annual dividend increases every year for nearly three decades now. With a payout of less than 50%, there's enough room for higher dividends even profits were to decelerate. That's unlikely though given how aggressively ADM has restructured is portfolio in recent years.
On the one hand, ADM has divested low-margin businesses like cocoa and Brazilian sugarcane ethanol. On the other, it has made big strides in growth via acquisitions like that of WILD flavors in a $3 billion deal that also marked ADM's entry into the natural flavors market. These moves, along with management's targeted capital allocation policy of reinvesting 30%-40% operating cash flows into its business and returning the rest to shareholders or balancing it with mergers and acquisitions, should reap income investors rich rewards for years to come.
Terra Nitrogen: Strong financials and a hefty yield
Terra Nitrogen is a pure nitrogen fertilizer play that operates just one facility in Verdigris, Oklahoma. But that shouldn't make you underestimate the stock's dividend potential. As a master limited partnership (MLP), a major chunk of Terra Nitrogen's profits is passed on to shareholders in the form of dividends, or distributions in MLP parlance. That means while Terra's dividends can fluctuate given that it's a variable-rate MLP where distributions depend on cash flows, the stock has maintained yields above 3% through the past decade.
Terra Nitrogen has a solid backing in its General Partner CF Industries, which oversees all its operations and buys out all of Terra Nitrogen's production. To give you a little more background, nitrogen is the most important and widely used fertilizer and CF Industries is the largest nitrogen producer in the world.
Of course, owning an MLP comes with its fair share of risks and tax complications, but Terra Nitrogen also has a solid history of margins and returns on equity to boot. Risk-averse income investors, though, may opt for CF Industries instead, but that would mean substantially lower yields -- Terra Nitrogen currently yields nearly 7.5% compared to CF Industries' 4.2% yield. Both are strong dividend stocks though, so choose one that suits your risk profile best.
Agrium Inc./PotashCorp: Strong dividends likely after merger
Agrium and PotashCorp are about to merge in near months subject to regulatory approvals and name the combined entity as Nutrien.
From the time of announcing their intention to merge, both companies have maintained that the merged entity will aim for a dividend "equal to" Agrium's current level. To be fair, it's not clear whether "equal to" means payout ratio, yield, or dividend amount here. Regardless of which one it is though, shareholders, especially in PotashCorp, should benefit given how rapidly Agrium's dividends have grown in recent years.
Agrium currently pays out a healthy 40%-50% of its free cash flow in dividends and yields 3.6%. The stock has consistently yielded more than 2.5% in the past three years, which is perhaps the minimum that investors in Nutrien can expect. Given that Nutrien will be the world's largest fertilizer company, it could even emerge as one of the top dividend stocks in agriculture in coming years.