Dividend stocks are everywhere, but many just downright stink. In some cases, the business model is in serious jeopardy, or the dividend itself isn't sustainable. In others, the dividend is so low it's not even worth the paper your dividend check is printed on. A solid dividend strikes the right balance of growth, value, and sustainability.
Today, and one day each week for the rest of the year, we're going to look at one dividend-paying company that you can put in your portfolio for the long term without too much concern. This isn't to say these stocks don't share the same macro risks that other companies have, but they are a step above your common grade of dividend stock. See last week's selection.
This week I want to take a closer look at one of the world's largest miners, BHP Billiton
In China we trust
As goes China, so goes the world economy. That may be a simplistic way of putting it, but China has literally put the world economy on its shoulders. Recently, China passed a $156 billion infrastructure plan which is meant to get its "below average" 7.6% GDP growth back to its 30-year-normalized average of 10%. Infrastructure plans like this are great news for large miners like BHP that supply iron ore, copper, and plenty of other metals used in heavy construction.
But things won't be easy for BHP or any miners in particular. Inflationary costs like fuel and labor are always threatening to eat into margins. In addition, mine development costs have soared in recent years. Some of the largest gold miners, including Newmont Mining
Now that's what I call diversified
There aren't many ways to get around rising costs... unless you have a mineral portfolio as diverse as BHP Billiton's!
BHP Billiton's primary growth engine is its iron ore sales. As the No. 3 global producer of iron ore, behind only Brazil's Vale
Beyond iron ore, BHP's mining portfolio is very diverse, with copper, lead, gold, silver, zinc, and even diamonds being unearthed. Trust me, this is the abbreviated list! But, it's BHP's two other (largely unpopular) mined resources that I feel give it a long-term edge.
One is BHP's metallurgical and thermal coal operations. Coal is vehemently unpopular at present, but it still represents a primary energy source for newly industrialized nations like China and India. I see decades of growth still to come in coal from Asia and other emerging markets.
The other is BHP's oil and natural gas operations. There's been a lot of bad press and talk of writedowns thrown BHP's way for its $17 billion investment in U.S. shale gas assets in 2011, but with a rebound in natural gas prices in recent months, as well as a bright long-term outlook for the fuel within the U.S., the purchase should have no problem paying off in the end.
A gusher of a dividend
But, as I quip every week, let's get to the real reason that we're here: BHP's dividend!
Despite suffering through two recessions since 2000, BHP has managed to raise its annual dividend (paid semi-annually) in each of the past 13 years. Have a look for yourself at how quickly this dividend has matured:
Source: Nasdaq.com & Dividata; * = assumes semi-annual payout of $1.14.
No, your eyes aren't deceiving you; that is indeed a compounded dividend growth rate of 23.6% over the last 10 years! BHP's payout ratio of just 38% also leaves plenty of room for future growth even if the global economy takes a turn for the worst.
With China's growth slowing and Europe's debt crisis canceling out any hope of a quick revival in manufacturing in that region of the world, you may not immediately think of the mineral mining sector as a top investment. But given what we've learned about BHP with regard to its mineral portfolio diversity, and its outperformance relative to its peers, there's little reason to believe that BHP Billiton's dividend won't head even higher. In a world of topsy-turvy mineral investments, this is one you can comfortably sock away under your pillow for a decade or longer.
Just as I've highlighted BHP Billiton here, our analysts at Stock Advisor recently dug deep to find a tiny gold miner that could be sitting on a mountain of the yellow metal. Find out the identity of this gold stock that could be shortly digging up massive profits by clicking here to get your copy of this latest special report. And oh yes, it's free!
Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on Motley Fool CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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