As many individual investors
have taken a cue from professional and institutional money managers,
alternative investments have gone mainstream – and commodities lead the
trend. Interest in this asset class has exploded as individual retail
investors have discovered commodities’ vast benefits, like low
correlation to equities and bonds, inflation-fighting
capabilities and their ability to profit from some of the world’s
fastest-growing emerging markets. These benefits have made funds like
the PowerShares DB Commodity Index Tracking Fund (DBC) popular holdings in many portfolios [for more commodity news and analysis subscribe to our free newsletter].
Yet for many investors, commodities are
generally thought of as a growth element added for a capital gain
component. The path to income often leads investors to other pastures.
But what many do not realize is that commodity investing can be combined with the power of dividends
as many seek out a steady income stream. From faster compounding of
gains and providing downside protection in bear markets to simply
providing a way to pay the monthly bills, dividends are surely as
powerful as natural resources for an investment strategy.
Combining the two is advantageous for
portfolios and, luckily, there are plenty of options for gaining
dividend exposure inside the commodities patch. Below, we outline 13
commodity stocks with strong dividends to prepare your portfolio for
2013.
1. Archer Daniels Midland (ADM)
Archer Daniels Midland is an agricultural giant. At its core, the company serves as the connection between raw crops and the various products derived from them in more than 75 countries. At its numerous processing plants, ADM converts raw corn, oilseeds, wheat and cocoa into products for food, animal feed, industrial and energy uses. That includes protein meal, vegetable oil, corn sweeteners, flour, biodiesel, ethanol, and other value-added food and feed ingredients [see also 50 Ways To Invest In Agriculture].As the world’s population continues to grow, so does demand for quality foods, feed ingredients for livestock, alternative fuels and environmentally-friendly alternatives to traditional chemicals. As one of the world’s leading agricultural processors, ADM plays a pivotal role in meeting all of these needs. As an income investment, it can’t be beat. It has raised its dividend annually over the last 25 years and currently pays a 2.58% dividend.
2. BHP Billiton Limited (BHP)
If investors wanted to buy a “one stop shop”
for their commodities portfolios, it would have to be BHP Billiton
(BHP, BBL). The natural resource giant has its hands in everything from
iron ore and coal to oil assets and diamond mining.
Founded in 1860, BHP Billiton has grown to over 100 different fields
and mine sand offices, and the company is quite global in scope. That
worldliness provides plenty of dividend firepower as well.
As for the two tickers – the firm was
created from the merger of BHP Limited (an Australian listed company)
and Billiton Plc (a U.K. listed company). The merger was effected by way
of a dual listed companies (DLC) structure. That means that although
the companies technically continue to be separate legal entities, they
are managed and run as a single economic entity. BHP currently yields
2.69% and BBL yields 3.04%. The yield difference lies in how the
vehicles are subject to foreign withholding tax [see also The Ten Commandments of Commodity Investing].
3. Cliffs Natural Resources (CLF)
The great infrastructure build-out remains
the name of the game for many emerging market nations, and the heart of
that build-out is iron ore and steel. Cliffs Natural Resources is a
leading producer of iron ore pellets, fine and lump ore, and
metallurgical coal. Pricing struggles within its coal holdings
are responsible for CLF’s big drop over the last year. However,
metallurgical coal is the kind used to make steel, not for electricity.
That puts it in a better position than other coal producers for the
future.
Cliffs Natural Resources currently yields a whopping 7.74%, if it can hold its dividend throughout the new year.
4. Deere & Company (DE)
Its
bright green and yellow tractors are a staple of almost every farm on
the planet; however, Deere & Company is more than just combines and
threshers. The company also produces a variety of construction,
earthmoving, material handling, and timber
harvesting machines, as well as off-high diesel engines. This
leadership position in a variety of heavy duty manufacturing has
produced a steady dividend play tied to a variety of commodities.
Deere’s dividend prowess was recently highlighted by everyone’s favorite value investor, Warren Buffett. Retail investors can tap into DE and gain a 2.15% yield.
5. Market Vectors Junior Gold Miners ETF (GDXJ)
Investors continue to flock to gold as a way to play all the of quantitative easing programs and currency debasement
currently going on in the market. Equally as appealing are those firms
that dig up the precious metal. However, thinking small might be a
better bet for your gold allocation, or at least a portion of it. The
junior miners offer some of the greatest leverage with regard to
increasing gold demand and rising prices, and the Market Vectors Junior Gold Miners ETF is the best way to play it.
The ETF spreads its $2.8 billion assets among 75+ different global junior gold and silver miners. Best of all, the fund yields a juicy 5.59%.
6. Market Vectors Coal ETF (KOL)
Despite the recent moves by the EPA and the Obama administration to kill coal use by power plants in the United States, global coal consumption
continues to rise at exponential rates. Driven by emerging market
demand, coal’s future as a piece of the world’s energy pie is pretty
much assured. That is why the Market Vectors Coal ETF may look like an
enticing value play. The fund has fallen hard over the last year or so
as the new U.S.-focused regulations have taken hold.
7. UBS E-TRACS 2x Long Alerian MLP Infrastructure ETN (MLPL)
As investors have sought income, pipeline master limited partnerships
(MLPs) have become ultra-popular, as they typically offer juicy tax
deferred yields – often in the 5-7% range. These firms allow investors
to participate in the growth of domestic energy production without the
price fluctuations of crude oil or natural gas futures.
By using a little leverage, MLPL allows
investors to juice their returns even more. The fund–which tracks 25
MLPs–pays a variable quarterly coupon linked to the leveraged cash
distributions associated with the underlying MLP constituents. That
results in a monster 10.71% distribution yield. Add in the tax
efficiency of the ETN structure and you have a perfect way to
super-charge your income.
8. Nucor Corporation (NUE)
The ailing global economy
hasn’t been so kind to iron and steelmaker Nucor; however, its
mini-mill focus and 200 different facilities have helped it become one
of the nation’s largest steel producers. Producing sheet steel, bar
steel, steel fasteners, wire and wire mesh, and ferrous and non-ferrous
metal, Nucor continues to expand and become the go-to manufacturer for
the “back-bone” of modern society. That dominance continues to punch
great cash flows and dividends for investors [see also Dividend Special: Top Companies In Every Major Commodity Sector].
Nucor currently pays an industry leading
3.52% dividend and has raised that payment for over 25 years. All in
all, Nucor remains one of the best plays in the steel industry.
9. Plum Creek Timber (PCL)
Most investors choose to place their commodity bets on energy, agriculture and metals. However, timber
is equally as exciting and has historically been a great long-term
investment. According to data provided by Forisk Timber Group, the
timber sector has outperformed many other asset classes in annualized
returns over the last 10 years. In 2011, a basket of timber companies
returned 5.69%. Add in the sector’s inflation protection and you have a
recipe for portfolio success.
The best way to play the commodity could be the nation’s largest land holder,
Plum Creek Timber. Structured as a real estate investment trust (REIT),
the company owns and manages 6.4 million acres worth of timberlands in
the United States and produces plywood, medium density fiberboard and
related by-products, such as wood chips. The REIT structure also pays a
strong 3.93% dividend.
10. Rio Tinto (RIO)
Like BHP Billiton already on this list, Rio
Tinto is a jack-of-all-trades when it comes to natural resources. The
company’s globally diverse portfolio covers everything from aluminum,
copper, gold, molybdenum, silver, diamonds, coal, uranium and salt. The
crown jewel in RIO’s portfolio is its iron ore operations. Rio Tinto is
the world’s largest producer and exporter of iron ore
and pellets. However, its diverse exposure to various hard assets makes
it a perfect way to play the emerging world’s growing demand.
That diverse exposure also provides Rio
Tinto with robust cash flows that help pay its dividend. RIO’s dividend
is currently $1.45 a share – equating to a 2.69% yield [see also 25 Things Every Financial Advisor Should Know About Commodities].
11. Southern Copper (SCCO)
Southern Copper engages in mining, exploring, producing, smelting, and refining copper
and other minerals in politically friendly Latin American nations of
Peru, Mexico and Chile. Featuring high levels of ore grades, Southern
Copper continues to churn out sales and, as a publicly-traded subsidiary
of Grupo Mexico S.A.B. de C.V, it churns out dividends as well.
In 2011, SCCO paid out $2.1 billion to
shareholders, and 2012 is shaping up to be another banner year. Shares
of the firm yield 9.82%.