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3 High-Yield Commodity Stocks

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While commodity stocks are higher-risk options for income-seekers, that risk can be well worth the reward of a much higher yield.

Commodity prices can fluctuate wildly, especially when supply and demand get out of whack. However, the higher risk associated with that volatility can often yield a higher reward. That certainly seems to be the case for Phillips 66 Partners (PSXP), BHP Billiton (BHP -0.46%), and Alliance Holdings GP (NASDAQ: AHGP), all of which offer investors attractive dividend yields. Here's why we think income-seekers should take a closer look at these high-yield commodity stocks.

High-yield with growth opportunities

Sean O'Reilly (Phillips 66 Partners): Finding a safe high-yield commodity stock has been easier said than done in recent years. Fortunately, there are still a few options for those who know where to look. One of them is the publicly traded master limited partnership (MLP) of Phillips 66 (PSX 2.39%): Phillips 66 Partners. The company owns and operates crude oil, petroleum, and natural gas liquid (NGL) pipelines and terminals (known in the industry as midstream assets) that primarily service Phillips 66 refineries. Phillips 66 Partners owns over 2,000 miles of pipelines in addition to 25 storage and terminal properties.

A graph of oil prices against a background of $100 bills

Image source: Getty Images.

Phillips 66 Partners is not without risks, as it is dependent on the demand from its parent company's refineries. That said, geographic expansion and diversification are going to be the name of the game in the years ahead. On Sept. 22, Phillips 66 Partners announced the $2.4 billion acquisition of Phillips 66's interests in two crude oil pipelines that service the Bakken region, as well as full ownership of a fuel-grade coke processing plant. The transaction benefits both parties, as the parent company frees up capital for its expansion efforts and the MLP expands its portfolio of cash-flow-generating assets. Deals like this, plus expansion initiatives that include a plan to expand the company's STACK pipeline, practically guarantee a bright future of high-yield dividend payouts.

Phillips 66 Partners has a distribution that has grown at 33% per year since its initial public offering in 2013, plenty of organic growth initiatives, and a 4.6% dividend yield. It's a stock that any Foolish investor interested in high-yield commodity plays should check out.

A unique policy could yield a big payout when commodity prices are high

Matt DiLallo (BHP Billiton): Global resources giant BHP Billiton offers investors unparalleled diversification across commodities. Not only is it one of the global leaders in both copper and iron ore, but it also produces zinc, nickel, coal, oil, and natural gas. That broad exposure enables the company to generate more consistent cash flow, which it uses to pay one of the top dividends in the metals and mining industry.

Aside from its broad diversification, another thing that sets BHP Billiton apart from others in the industry is its unique dividend policy. Instead of setting a flat dividend each quarter, BHP Billiton pays out 50% of its free cash flow as a base dividend. Furthermore, it can allocate a portion of any excess to supplement the payout at its discretion. Its most recent dividend, for example, was $0.33 per share under the minimum payout threshold. However, due to the strength of its balance sheet and cash flow, the company's board authorized an additional $0.10 per share in dividends. That brought the payout up to $0.43 per share, significantly higher than the $0.14 per share it paid in the prior-year period when commodity prices were lower.

BHP Billiton's dividend policy means investors won't collect a steady paycheck, so the current 4.1% yield isn't one to take to the bank. But the plan does enable shareholders to earn more money when commodity prices rise, which has been the case over the past year. That upside potential makes BHP Billiton a commodity stock worth considering.

Large chunk of coal in the hands of a miner

Image source: Getty Images.

A lot of cash in coal

Tyler Crowe (Alliance Resources GP): Coal miner Alliance Resources GP looks like a good high-yield investment today, especially with a dividend yield higher than its subsidiary partnership Alliance Resources Partners (ARLP -0.40%).

On the business side of things, Alliance is possibly the only coal company in the nation that can say it's in good financial shape. Even after a couple of years in which several of its larger peers went through bankruptcy restructuring to lower debt loads, Alliance's total debt-to-EBITDA ratio of 0.8 is better than any other major publicly traded coal company. It also helps that Alliance's coal mines in the Illinois Basin both are the lowest-cost coal mines in the country and are cost-competitive with natural gas, at about $1.75 per million BTU.

Here's where it gets interesting. Typically, general-partner entities like Alliance Resources GP have lower dividend yields than their subsidiary partnerships. That's because they are C corporations, which means there is less tax paperwork to own them, and they're taxed at capital-gains rates instead of personal-income-tax levels. In this case, though, the general partner actually has a higher dividend yield than the limited partnership, suggesting that the market is mispricing this asset.

I can't say with certainty that coal is a buy-and-hold-forever investment, with the pressure of cheap natural gas and the rapid cost decline of renewable energy. With Alliance's coal mines churning out product at such low costs, though, it will likely be around for a long time, and throwing off large payouts to investors for some time to come.

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Stocks Mentioned

Phillips 66 Stock Quote
Phillips 66
$99.08 (2.39%) $2.31
Alliance Resource Partners, L.P. Stock Quote
Alliance Resource Partners, L.P.
$19.90 (-0.40%) $0.08
BHP Group Stock Quote
BHP Group
$68.69 (-0.46%) $0.32
Phillips 66 Partners LP Stock Quote
Phillips 66 Partners LP

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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