Commodity investing isn't for the faint of heart, but one smart way to offset the volatility associated with it is by getting into that arena via dividend-paying stocks. You might be surprised to hear that despite the unpredictable nature of their businesses, a number of commodity stocks boast strong dividend track records, and offer good yields today.
With key commodity prices bottoming, now is an excellent time to invest in top companies such as metals and mining giant Rio Tinto (RIO -0.96%), agricultural titan Archer Daniel Midlands (ADM -1.09%), and oil and gas heavyweight ExxonMobil (XOM -0.14%). Read on to know what makes their stocks such compelling commodity plays today.
This mining dividend has strong growth potential
With its yield hovering around 5.7%, Rio Tinto is among the top dividend stocks in commodities today. What is important to recognize is that the stock price has also climbed almost 25% year to date, meaning that growing dividends rather than declining share prices are driving its yield. At the heart of this growth is Rio's commitment to return 40% to 60% of its underlying earnings to shareholders in the long run, and its practice of topping that off with extra dividends during boom periods. During the first half of 2017, Rio returned $2 billion to shareholders in interim dividends as its underlying earnings jumped 2.5 times year over year.
Dividend stocks are a smart way to play commodities. Image source: Getty Images
So what's fueling Rio's growth? I'd say it is the company's aggressive and well-balanced efforts to cut costs, deleverage, and expand core operations. Consider that it has saved nearly $8.2 billion in costs since 2012 by divesting non-core assets and restructuring debt. And Rio isn't done yet – it slashed its net debt by $2 billion during the first half of this year and sold its Coal and Allied Industries subsidiary for $2.69 billion earlier this month. By 2021, Rio expects to generate cumulative free cash flow of $5 billion primarily through improved capacity and asset utilization.
It's important to note though that Rio's underlying earnings (a statistic that excludes one-time charges like impairments and gains or losses on assets) can fluctuate due to its ongoing restructuring efforts. That means you shouldn't really expect stable dividends from the company. However, Rio's focus on growth and a strong balance sheet should drive its cash flows, dividends, and share price higher.
As long as we eat, this stock should pay a dividend
Given the agriculture industry's importance to the economy, investing in an agricultural stock that pays out regular dividends should pay off in the long run. Archer Daniels Midland could be your best bet on that front for the simple reason that it is the only company in the industry to have increased its dividend for at least 25 years in a row.
ADM is primarily a food processing company that transforms crops like corn and oilseeds into a variety of essential products like food and fuel ingredients, and animal feed. As demand for its products doesn't ebb and flow as much with crop prices -- in contrast to agricultural inputs like fertilizers -- ADM has been able to ride out the storms better than most agricultural companies and increase dividends even during the toughest of years.
ADM Dividend data by YCharts
As the chart shows, ADM has become even more generous with its dividend hikes since 2014. That's because the company has gone on an acquisition spree, while simultaneously divesting itself of non-core operations to redirect resources toward its more profitable businesses.
Image source: ADM
The strategy has started to pay off, as evidenced by the company's expanding margins and cash flows. ADM expects to boost its dividend payout to 30% to 40% in the medium term, backed by more stable and growing earnings. In other words, ADM's dividend growth is here to stay.
A dividend gem in oil
If you think oil and gas companies can't be dividend growth stocks, consider these three incredible facts about ExxonMobil:
- It has paid a dividend every year since 1882.
- It has increased its dividend every year for 35 consecutive years.
- Its annual dividends have grown at an average rate of 6.4% in the past 34 years and 8% over the past decade.
Few companies can boast a comparable track record.
Image source: Getty Images
So how has ExxonMobil pulled off this feat despite operating in one of the most volatile sectors? A diversified portfolio and a rock-solid balance sheet have played key roles in securing the company its spot in the elite Dividend Aristocrats list. It operates on the upstream as well as the downstream side of the oil and gas industry while also running chemical operations. So when lower oil prices become detrimental to ExxonMobil's upstream business, it can boost earnings at its downstream (refining) and chemicals businesses. Thanks to that integrated business mix, Exxon has been able to remain profitable even during challenging times. Solid financials and prudent capital allocation have further supported the company's dividends.
ExxonMobil has made some promising discoveries lately, and it's working through a pipeline of more than 100 developing projects, as well as aggressively improving efficiency to cut costs. Given all of that, shareholders can rely on its dividend growth story to continue for years or even decades to come. Its yield of 3.9% may not be the best in the industry, but its unparalleled dividend record more than makes up for it.
