Commodity investing has long been utilized by active traders but left out of the hands of more traditional investors that build long-term portfolios. But as the years have progressed, investors have seen the benefits of setting aside anywhere from 5%-10% of your assets to this crucial asset class, as it offers the potential for uncorrelated, and often times stellar, returns. A long term play in most commodity securities, however, is more of a growth play than anything else, as the investor hopes for the underlying commodity to either appreciate in value or it its overall use, leaving value investors out to dry [see also The Guide To The Biggest Companies In Every Major Commodity Sector].
For those who subscribe to the power of the steady income stream that value investing offers, it can be hard to stray into a riskier asset class that pays no yield whatsoever. However, now that the commodity space has evolved from just futures contracts to a number of publicly traded firms and funds, value investors can allocate the necessary assets for commodity exposure while still maintaining their yield-based strategy. Below, we outline four commodity-based securities with yields topping 5%, making them an enticing grab for just about any investment portfolio [see also Three Reasons Why Gold Is Overvalued].
Southern Copper Corp. (SCCO) – 10.1%
Based in Phoenix, this firm engages in the mining, exploring, smelting, and refining of copper with primary operations coming from Mexico, Chile, and Peru. Though its main business is dedicated to copper, the firm also operates mines that produce zinc, lead, copper, silver, and gold, giving them a nice wide net over the metals mining industry. SCCO has a nice market cap eclipsing $26 billion with an average daily volume around 3 million. The company has a payout ratio of 81% with over 80% of shares being held by insiders, something to consider before investing. On the plus side SCCO has had great quarterly revenue and earnings growth with relatively low debts, making its current yield of 10% extremely enticing [see also 13 Ways To Invest In Copper].
Natural Resource Partners LP (NRP) – 8.1%
This MLP is in the coal business. NRP buys and manages coal properties all across the U.S. and it also leases its properties out to miners in exchange for royalties. Aside from the actual ownership of various sites, NRP also owns preparations plants and other various coal facilities. As of year end 2009, the firm had over 2.1 billion tons of proven coal reserves. Digging beyond the impressive 8.1% yield, this stock has a relatively low trading volume of just 238,000 which may make it less appealing. Investors should be aware that the payout ratio is sitting at 119%, which falls on the higher and riskier side. The company reported a nice 25% quarterly growth recently (year-over-year) and the stock price has gained 4.4% in the past 52 weeks [see also Beyond UNG: Three Intruiging ETFs To Play Natural Gas].
Transocean Ltd. (RIG) – 7.1%
Transocean is a major oil and gas driller and explorer, but you probably know them best from the Deepwater Horizon oil spill in 2010, in which the company operated the failed rig. Despite its history, the stock still presents itself as an interesting play. The company is stationed in Switzerland and boasts a market cap of over $16 billion. Recently, the company has hit some hard times as bad earnings have pushed the security to losses of more than 21% in the trailing year. But for those who buy into the drilling and exploration strategy of RIG, its yield of 7.1% make its beat-down stock price an attractive, but risky, option [see also Major Countries Burn Up Crude Reserves: Big Oil In Trouble?].
Kinder Morgan Energy Partners LP (KMP) – 6.1%
KMP is another popular MLP with a great dividend yield. Just over one-third of the company’s operations come from natural gas pipelines while CO2 and oil production account for another third of revenues. All in all, the company has over 15,500 miles of natural gas pipelines through out the United States. KMP has a market cap of $25 billion and an average daily volume nearing the 1 million mark. As far as the payout ratio is concerned, various sites list it all over the place. Yahoo! Finance clocks it in at just over 1,100% while FinViz reads nearly 2,300%. The payout ratio is measured by dividends per share over EPS, meaning that KMP is paying out far more than they are taking in. While a number of reasons could account for these absurdly high figures, it is clearly unsustainable over the long run and something to keep a close eye on. [see also Three Legendary Commodity Investors].
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Disclosure: No positions at time of writing.