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1 Great Dividend You Can Buy Right Now

By Sean Williams - Nov 30, 2012 at 6:30PM

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This stock has a dividend you can count on.

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. Check out last week's selection.

This week I'm going to turn my attention to the mineral mining sector and highlight an iron ore and metallurgical coal company with a monster dividend, Cliffs Natural Resources (CLF 0.93%).

Iron ore pelted
OK, hit me with the hate mail; I'm ready for it! I understand there's a mountain of reasons not to be investing in iron ore and metallurgical coal companies, and even Foolish metals magnate Christopher Barker has turned negative on Cliffs -- yet still I see nothing but a bright future for Cliffs.

The primary concerns affecting Cliffs (and much of the mining sector for that matter) are rising labor, fuel, and mine maintenance costs, as well as weakening iron ore prices overseas. Specifically, iron ore prices dropped off a cliff overseas, down 36%. Thankfully, its U.S. iron ore revenue per ton fell by a "much milder" 20%. As the global economy weakens, demand for iron ore, which goes into steel that can be used for everything from automobiles to heavy construction, tends to weaken as well. Cliffs has responded to this recent iron ore price drop by reducing its output forecast for next year by 9%-14%.

This is the same pattern we're witnessing across all mineral miners. Gold miners like Newmont Mining (NEM 1.63%), with Hope Bay, and Kinross Gold (KGC -0.22%), with its Tasiast mine in Mauritania, have had to put off mine excavation because of inflating costs, while coal miners CONSOL Energy (CNX -0.66%) and Arch Coal (NYSE: ACI) have closed mines or cut down on production (and in CONSOL's case, days of the week as well) just to curb expenses.

Everything that has a beginning has an end
I know I might sound like "Debby Downer," but there's good news: It's going to get better.

There are multiple reasons to believe that Cliffs Natural's fortunes could be on the precipice of a rebound. For one, China recently signed into bill a plan to spend $156 billion on infrastructure projects. The plan itself is meant to stimulate a Chinese economy that has seen GDP growth fall well below its normal 10% average over the past 30 years, but it should really be a boon for Cliffs as both the companies metallurgical coal division and overseas iron ore shipments should benefit in a big way. To add, the World Steel Association in April predicted that steel usage, thanks to China and India, would rise by 4.5% in 2013 -- not too shabby if you ask me!

Second, and it may not seem like it now, but simply having its operations diversified throughout the world will be a benefit when we see even the slightest hint of global growth. Cliffs Natural purchased Consolidated Thompson earlier this year in order to give itself a footprint in the Asian iron ore industry, which is especially important since Wuhan Iron & Steel is one of its largest customers. While maintaining a strong presence in North America, Cliffs appears ready to handle any major economic downturns and to take advantage of the next upswing.

Another reason is simply the killer cash flow that Cliffs can produce when all cylinders are firing at the same time. U.S. metallurgical coal production looks poised to see stronger pricing in 2013 and Cliffs has done a good job of reducing expenses with its met-coal operations. A rebound in U.S. housing and moderate growth in auto sales should also be a positive for iron ore pricing next year. Considering that Cliffs has produced positive free cash flow in each year since 2005, it's a name you can count on .

The mother of all mineral dividends
Finally, it's all about that delectable dividend and what Cliffs does for its shareholders. Since 2002, Cliffs' book value has skyrocketed from roughly $1 per share to its current value of $44.47 as it's used its strong cash flow to reinvest in its business and make earnings accretive acquisitions.

Cliffs has been paying a dividend to shareholders for more than 20 years, but only recently began making dividend payments an important part of its plan to create value and return profits to shareholders. Below you can see just how rapidly Cliffs payouts have advanced in recent quarters:


As you can see by this ridiculous 614% increase in quarterly payouts over just the past three years, Cliffs cares about its shareholders. Its payout ratio, based on 2013's EPS estimates, is a robust 75% which means that a good chunk of profits is going to shareholders -- and another reason why I'm man-crushing on its 8.4% yield. Even if seaborne iron ore pricing deteriorates further and Cliffs is forced to trim its dividend, it appears evident that management would like to be one of the premier dividend-paying companies in the minerals sector.

Foolish roundup
The best thing about value hunting is you can often find values in the last place people are willing to look. There are few companies more universally disliked at the moment than Cliffs, yet there are plenty of worldwide catalysts that could stabilize iron ore prices and actually shoot them higher. With a strong history of profitability, a diverse portfolio of iron ore and metallurgical coal mines, and one behemoth dividend, I see no reason why I can't call Cliffs Natural Resources a great dividend stock you can buy right now!

Is my bullishness on Cliffs Natural Resources misplaced? Get the full scoop by getting your copy of our latest premium research report on Cliffs Natural Resources. Packed with in-depth analysis on the opportunities and threats facing Cliffs -- and complete with a year of regular updates -- this report will give you the tools needed to make smart long-term investing decisions. Click here to learn more.

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Stocks Mentioned

Cliffs Natural Resources Inc. Stock Quote
Cliffs Natural Resources Inc.
$21.79 (0.93%) $0.20
CONSOL Energy Inc. Stock Quote
CONSOL Energy Inc.
$19.58 (-0.66%) $0.13
Newmont Mining Corporation Stock Quote
Newmont Mining Corporation
$67.19 (1.63%) $1.08
Kinross Gold Corporation Stock Quote
Kinross Gold Corporation
$4.50 (-0.22%) $0.01

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

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