Materials stocks with dividends can be income boosters.
Raw materials are building blocks of the U.S. economy. Iron ore and coal make the steel to build skyscrapers. Potash fertilizes crops. Oil and natural gas power trucks and businesses. The companies that produce these materials often do better as the economy gets going again after a downturn, and many materials stocks have surged as the world has gotten back on its feet after the worst of the pandemic. But that economic growth has ushered in a period of inflation, which can be a double-edged sword for materials stocks. On the one hand, inflation boosts the prices commodity producers can fetch for their products. But on the other, inflation and related interest rate hikes can put a damper on consumer demand, meaning producers of finished goods will make fewer items and therefore spend less on basic materials. With those competing forces in mind, here are six materials stocks that pay dividends, potentially providing a cushion of income in the volatile world of commodities investing.
Newmont Corp. (ticker: NEM)
Gold is one commodity that tends to do well in times of inflation. Because the precious metal is priced in U.S. dollars, declines in the value of the greenback make gold cheaper for those using other currencies, potentially boosting demand. “NEM is a great inflation hedge with a high correlation to both gold and silver prices,” says Nick Battista, market strategist with financial information network Tastytrade. Rising interest rates do threaten to lower inflation, but Battista says interest rates likely won’t increase fast enough to totally offset the dramatic rise in prices we’re seeing. “If you believe inflation will continue to outpace rates and supply constraints will continue, the materials sector as a whole should continue to benefit,” he says.
Dividend yield: 2.6%
Rio Tinto Group (RIO)
Materials stocks could be in for a rough ride over the short to medium term as central banks hike rates to combat inflation, says Uri Gruenbaum, CEO of TipRanks. With that outlook, some materials stocks might be bargains based on low price-earnings ratios that imply an investor is paying relatively less for each dollar of profit that the company generates. “Investors looking for value might seek relatively cheap stocks,” he says. Rio Tinto, the second-largest mining company in the world, is one of these, with a low P/E ratio of 5.9. Even though the stock is up roughly 30% so far this year, five analysts in a TipRanks consensus see the potential for 20% upside over the next 12 months. The company is also one of the largest dividend payers among basic materials stocks.
Dividend yield: 9.8%
Vale SA (VALE)
This iron ore miner “stands out as one of the best income generators for investors,” Gruenbaum says. The company paid $13.5 billion in dividends and interest on capital in 2021. In the fourth quarter, lower iron ore prices contributed to a year-over-year decline in revenue. But that was partially offset by higher sales volumes and higher base metals and coal prices. “Our outlook for iron ore remains positive, given the recovery of the global economy driven by the progress in global vaccination and the less harmful effects of new variants, leading to further opening of economies,” the company said in February. “We believe world steel production will grow slightly in 2022 as the global economy is strengthened by the reduction in supply chain bottlenecks, continued pent-up demand from past years, and rising business and consumer confidence.”
Dividend yield: 11.9%
BHP Group Ltd. (BHP)
With a market capitalization above $260 billion, BHP is the largest mining company in the world by stock market value. It mines base metals and coal, produces oil and natural gas, and supplies potash for agricultural production. With that size and diversification comes the stability you might expect from a dividend-paying company. Tracing its roots to 1851, the company has a long dividend track record. But keep in mind that dividends aren’t everything. While BHP has a high dividend ratio, the stock itself is projected to fall in price over the next 12 months. Four analysts in a TipRanks consensus see the potential for more than 17% downside over that time.
Dividend yield: 8.9%
SunCoke Energy Inc. (SXC)
Although global macroeconomic uncertainty, rising interest rates, rampant inflation and recessionary fears make the materials sector a highly volatile space, there is at least one potential bright spot for raw materials stocks, notes Gruenbaum. That’s the $1.2 trillion infrastructure bill in the U.S. “The projects that will benefit from the bill range from the building of bridges, highways and roads to extending the nation’s broadband capabilities,” he says. “Companies involved in production of the materials needed in all of these projects could potentially have more of a safety net in challenging times.” One of those companies is SunCoke, which produces the type of coal used in steelmaking. The company in February said it expects to bring in consolidated adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) of between $240 million and $255 million in 2022, a decline from 2021’s record of $275.4 million.
Dividend yield: 2.5%
LyondellBasell Industries NV (LYB)
Benjamin Halliburton, founder of Building Benjamins, says most of the upward move in materials stocks has already happened, and shares are generally selling at low multiples of peak cyclical earnings. But this Dutch plastics, chemicals and refining company is an exception when it comes to potential share appreciation, he says, with “upside to around $135 to $140 over the next year.” The stock was trading at $110.61 on April 19. Halliburton also sees the company increasing its dividend by roughly 5% annually over the next several years. “We believe that LYB is a good choice for moderate capital appreciation and dividend income,” Halliburton says.
Dividend yield: 4.2%
6 materials stocks with attractive dividends:
— Newmont Corp. (NEM)
— Rio Tinto Group (RIO)
— Vale SA (VALE)
— BHP Group Ltd. (BHP)
— SunCoke Energy Inc. (SXC)
— LyondellBasell Industries NV (LYB)
More from U.S. News
Update 04/20/22: This story was published at an earlier date and has been updated with new information.