Dividend payers deserve a berth in any long-term stock portfolio. But seemingly attractive dividend yields are not always as fetching as they may appear. Let's see which companies in the industrial metals and minerals industry offer the most promising dividends.
Yields and growth rates and payout ratios, oh my!
Before we get to those companies, though, you should understand just why you'd want to own dividend payers. These stocks can contribute a huge chunk of growth to your portfolio in good times, and bolster it during market downturns.
As my colleague Matt Koppenheffer has noted: "Between 2000 and 2009, the average dividend-adjusted return on stocks with market caps above $5 billion and a trailing yield of 2.5% or better was a whopping 114%. Compare that to a 19% drop for the S&P 500."
When hunting for promising dividend payers, unsophisticated investors will often just look for the highest yields they can find. While these stocks will indeed pay out the most, the yield figures apply only for the current year. Extremely steep dividend yields can be precarious, and even solid ones are vulnerable to dividend cuts.
When evaluating a company's attractiveness in terms of its dividend, it's important to examine at least three factors:
- The current yield
- The dividend growth
- The payout ratio
If a company has a middling dividend yield, but a history of increasing its payment substantially from year to year, it deserves extra consideration. A $3 dividend can become $7.80 in 10 years, if it grows at 10% annually. (It will top $20 after 20 years.) Thus, a 3% yield today may be more attractive than a 4% one, if the 3% company is rapidly increasing that dividend.
Next, consider the company's payout ratio, which reflects what percentage of income the company is spending on its dividend. In general, the lower the number, the better. A low payout ratio means there's plenty of room for generous dividend increases. It also means that much of the company's income remains in its hands, giving it a lot of flexibility. That money can fund the business' expansion, pay off debt, buy back shares, or even buy other companies. A steep payout ratio reflects little flexibility for the company, less room for dividend growth, and a stronger chance that if the company falls on hard times, it will have to reduce its dividend.
Peering into industrial metals and minerals
Dividend investors typically focus first on yield. Oxford Resource Partners and Natural Resource Partners are some of the highest-yielding stocks among industrial metals and minerals, recently offering 18.3% and 11.6%, respectively. But they're not necessarily your best bets. Oxford's dividend is fairly new, without much of a track record to assess, and net income has been in the red lately, suggesting that its dividend may not be sustainable for long. Natural Resource Partners, meanwhile, doesn't have the fastest dividend growth rate, and its payout ratio was recently near 400%, suggesting that it's paying out far more than it's generating.
Instead, let's focus on the dividend growth rate first, where you might be drawn to Walter Energy or Rangold Resources, as their five-year dividend growth rates top 24%. But their yields are 1.4% and 0.4%, respectively, meaning it will take a while for them to grow to substantial size. Arch Coal (NYSE: ACI), meanwhile, has an attractive 11.6% dividend growth rate and a reasonable 1.6% yield, but its earnings have been negative lately, and it has had to cut its dividend by two-thirds.
Some industrial metals and minerals companies, such as Molycorp (NYSE: MCP) and Thompson Creek Metals (NYSE: TC), don't pay dividends at all. That's because smaller or fast-growing companies often prefer to plow any excess cash into further growth rather than pay it out to shareholders. Molycorp shares recently hit a 52-week low, due to prices for rare-earth minerals falling sharply. It might be a solid long-term investment, but in the short run, it's very much at the mercy of supply-and-demand dynamics, which can be volatile. Thompson Creek, meanwhile, is down nearly 70% over the past year, largely on a big price drop for molybdenum. Some see it as rather undervalued now, while others worry about its rising debt.
Just right
As I see it, Alliance Resource Partners (Nasdaq: ARLP) and Cliffs Natural Resources (NYSE: CLF), recently yielding 6.9% and 6.2% respectively, offer the best combination of dividend traits, sporting some solid income now and a good chance of strong dividend growth in the future.
Alliance's dividend has been growing at an average annual rate of about 12.5% over the past five years, while Cliff's has been growing at 33.2%, thanks to a massive recent increase. Alliance is in the beleaguered coal industry, but has been faring well thanks to having established some long-term contracts. It has been upping its dividend quarterly for several years now -- not annually, as is the norm. It does carry sizable debt, but it seems manageable.
Coal is largely why Cliffs is down some 46% over the past year, but bulls like its prospects, especially once the auto industry and others are recovering more strongly, as Cliff's metallurgical coal is used in making steel. It, too, seems priced attractively.
Of course, as with all stocks, you'll want to look into more than just a company's dividend situation before making a purchase decision. Still, these stocks' compelling dividends make them great places to start your search, particularly if you're excited by the prospects for this industry.
Do your portfolio a favor. Don't ignore the growth you can gain from powerful dividend payers.
