The commodity business is notoriously cyclical, which can make it incredibly hard to find stocks in this business that can reliably pay a high-yield dividend for long stretches of time. That doesn't mean, though, that they can't be found.
We asked thee of our investing contributors to each highlight a high-yielding commodity stock they see as one investors could get paid for owning for several years. Here's why they picked Enviva Partners (EVA), Occidental Petroleum (OXY -1.65%), and Rio Tinto (RIO -2.96%).
An under-the-radar industry that could pay you handsomely
Tyler Crowe (Enviva Partners): While solar and wind power have grabbed the spotlight in the electricity market, there is another power source growing at a surprisingly rapid rate: biomass. For many places around the world, wind and solar simply aren't viable options. One alternative for these regions is to use wood pellets as a replacement for coal-powered plants. Not only do pellets qualify as a suitable lower-carbon alternative for countries to meet their stated emission targets -- greenhouse intensity of wood pellets is 74%-85% less than coal -- but they're also proving to be a relatively low-cost option for these parts of the world. Currently, biomass-burning combined heat and power facilities are less than half the cost of a solar installation in Germany on a per-megawatt-hour basis.
That's where Enviva comes in. It's the world's largest supplier of wood pellets with just under 3 million tons per year of processing capacity. What's more important, though, is all of that production is already contracted under off-take agreements. In fact, based on its backlog, the company needs to increase production to meet its future contracts, so there is some growth already baked into the stock. With those contracts solidly in place, operational efficiency and cost control are the name of the game for Enviva, and it has done a commendable job of doing just that, with per-ton margin exceeding $40 for the past six quarters. High margin on a reliable revenue stream makes for a great dividend-paying stock.
Enviva has a distribution yield of 7.5%, so the company will pay you quite handsomely to hang on to its shares. With growth opportunities in the wood-pellet business providing a solid growth runway, this is a high-yield stock worth keeping track of.
A gusher of a dividend from an oil stock
Matt DiLallo (Occidental Petroleum): While many oil companies cut their dividends during the recent oil market downturn, Occidental Petroleum bucked that trend. In fact, it has continued to increase its payout, notching its 15th consecutive annual raise this year. Because it has continued to grow the payout, the stock currently yields an eye-catching 4.75%.
Three factors fueled Occidental Petroleum's ability to keep boosting the dividend in the face of falling oil prices. First, it has maintained a top-tier balance sheet, including holding a healthy cash position that stood at $2.2 billion at the end of last quarter. Second, the company generates steadier cash flow than most rivals because of the makeup of its portfolio, which includes low-decline enhanced oil properties in the Permian Basin, chemicals facilities that tend to make more money when commodity prices fall, and midstream assets that collect predictable fee-based income. Finally, the company has low-cost operations and is currently getting close to the point where it can produce enough cash flow at $50 oil to pay its dividend and fund a capital program that could increase production by 5% to 8% per year.
These factors position Occidental Petroleum to continue paying a generous and growing dividend even if oil remains low.
A truly global commodity stock
Sean O'Reilly (Rio Tinto plc): Finding above-average dividends in the mining space can be tricky. Commodity producers serve as price takers and are subject to the whims of supply and demand. Though many pay dividends, long-term success for a commodity stock requires serving as a low-cost producer. Rio Tinto, as one of the world's most prominent metals and mining corporations, is just such a commodity stock.
Rio Tinto has its hands in numerous commodities, including uranium, borax, titanium, aluminum, copper, and even diamonds. This diversification is what makes Rio Tinto such a solid commodity dividend stock. Unlike many players in the commodity world whose fortunes are tied to just one or two base commodities, shareholders here can rest easy, as the diversification allows the company to allocate capital where it can generate the highest returns. The proof is in the free cash flow results, which amounted to approximately $4.5 billion last year. This year is shaping up to be even better. Through June 30, Rio has already managed to generate the same amount, thanks in part to the $2 billion cash-cost reduction target that it met in the first half of this year. That's key for dividend investors, as Rio Tinto pays out $1.12 billion per quarter in dividends. With a broad portfolio of commodity assets and a 5.8% dividend yield, Rio Tinto PLC should be a top pick for high-yield-focused Foolish investors.