7 Commodity Stocks to Buy for Dividends, Inflation Hedging

One of the drawbacks to investing directly in commodities, or in derivatives contracts like futures and options, is that they don’t pay dividends.

But the same isn’t true of commodities producers. Many oil and gas companies, miners and commodities traders have decent yields. Plus, they offer the potential for share price appreciation if the commodities they produce rise in price or the company adds value in other ways.

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The prices for commodities such as oil and copper tend to rise when the economy is doing well, or is expected to improve, as demand from the industrial sector ramps up.

That same demand can also cause prices for other goods and services to rise, but commodities investors are at least somewhat cushioned from that inflation, as the price of raw materials they own in physical form or via producers also rises.

“Investors who are after inflation protection, capital appreciation and dividends should really dig into the commodity equity space,” says Daniel Bustamante, managing partner and chief investment officer of hedge fund Bustamante Capital. Here’s a list to get started with:

Commodity stock Forward dividend yield*
Rio Tinto Group (ticker: RIO) 6.5%
Vale SA (VALE) 11.9%
Archer-Daniels-Midland Co. (ADM) 3.3%
Exxon Mobil Corp. (XOM) 3.2%
Pioneer Natural Resources Co. (PXD) 4.1%
National Fuel Gas Co. (NFG) 3.8%
Suncor Energy Inc. (SU) 4.2%

*Source: Fidelity, as of April 17.

Rio Tinto Group (RIO)

Speaking of digging in, we’ll start with mining companies.

Rio Tinto is the second-biggest mining company in the world based on market value, after its rival BHP Group Ltd. (BHP). Both are solid companies with strong dividend yields, but Rio Tinto takes the pole position with a forward dividend yield of 6.5% as of April 17.

Rio Tinto produces aluminum, copper and iron ore and is developing a lithium project. Copper demand is expected to increase because it is needed to build renewable energy installations and connect them to electrical grids. Copper and lithium are key materials for electric vehicles.

In an analyst note on April 17, RBC Capital Markets said Rio Tinto provides “compelling” free cash flow and dividend yield and a strong balance sheet.

Vale SA (VALE)

Like Rio Tinto, Vale is a diversified mining company. It produces iron ore, nickel, copper, cobalt and other materials.

Producing multiple metals or materials can help cushion the companies in the volatile world of commodities. When one commodity’s price is down — like nickel’s is at the moment because of oversupply from Indonesia — a stronger-performing metal like copper, which is up about 8% over the past year, can provide a hedge.

Vale is the world’s biggest iron ore producer, and this product is key to making steel, a material that is crucial for economic growth, as it is used in buildings, infrastructure, vehicles and appliances.

The stock is yielding 11.9%, giving it the highest dividend payout percentage on this list.

Archer-Daniels-Midland Co. (ADM)

A high yield isn’t everything, however. Investors should also consider how long a company has paid a dividend and how often it raises its payout.

“We think that the best dividend stocks aren’t simply the highest-yielding dividend stocks,” Susan Dziubinski, an investment specialist for Morningstar, said in a blog post on April 15. “Instead, we suggest that investors look beyond a stock’s yield and instead choose stocks with durable dividends and buy those stocks when they’re undervalued.”

High-quality companies that have grown their dividends for at least 25 consecutive years are known as Dividend Aristocrats. The ProShares S&P 500 Dividend Aristocrats ETF (NOBL), an exchange-traded fund, focuses exclusively on these companies, which generally have stable earnings and strong histories of profit and growth.

Archer-Daniels-Midland is the sixth-largest holding in this fund. One of the largest agricultural commodity trading firms in the world, ADM is yielding 3.3%, and according to Dividend.com, it has increased its dividend for 52 consecutive years.

Exxon Mobil Corp. (XOM)

This oil and gas producer is the fund’s No. 2 holding. A household name, Exxon has raised its dividend for 41 consecutive years. It is yielding 3.2%.

In a recent investment strategy letter, Madison Investments, which offers the Madison Dividend Income Fund (MDMIX), highlighted Exxon, which is included in the fund. “We believe it has attractive low-cost acreage in the Permian Basin and has a sizable growth opportunity in Guyana,” the fund’s portfolio managers wrote in the letter. “Further, we think XOM has a sustainable competitive advantage due to size and scale, and its ability to integrate refining and chemical assets provides a low-cost advantage versus competitors.”

Pioneer Natural Resources Co. (PXD)

Exxon is in the process of buying this oil and natural gas exploration and development company. But the deal hasn’t closed yet, and Pioneer is yielding 4.1%.

Pioneer is also No. 7 on the Morningstar blog’s 10 picks for best dividend stocks to buy. According to the blog, Pioneer is cheap as it is trading about 13% below Morningstar’s fair value estimate of $309. The stock closed April 17 at $267.79.

Scotiabank raised its 12-month target price for Pioneer in April to $282 from $230, giving it a “sector perform” rating. The company is expected to report lower earnings year over year later this month, but revenues are projected to be 16% higher, and PXD has beaten consensus earnings-per-share estimates three times in the past four quarters, according to Zacks.

National Fuel Gas Co. (NFG)

Bustamante likes this energy company, which operates natural gas assets in four business segments: exploration and production, pipeline and storage, gathering, and utility.

“This is one of my favorites right now based on a few reasons,” Bustamante says. The company is trading at a very low price-to-earnings ratio, for one, and it recently announced a share-repurchase program of up to $200 million.

The company has increased its dividend for 54 consecutive years, according to Dividend.com, and the stock is yielding 3.8%.

Suncor Energy Inc. (SU)

This Canadian energy company is also one of Bustamante’s top picks for commodities dividend stocks.

Suncor has oil sands and offshore oil operations, and it refines petroleum in Canada and the United States. It also has retail and wholesale distribution networks as well as energy trading activities focused primarily on crude oil, natural gas, byproducts, refined products and power. “They are likely to issue a special dividend or increase share buybacks in the coming quarters,” Bustamante says.

The stock is yielding 4.2%.

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7 Commodity Stocks to Buy for Dividends, Inflation Hedging originally appeared on usnews.com

Update 04/18/24: This story was previously published at an earlier date and has been updated with new information.

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