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.
KOL features a global portfolio of 35 different coal producers – many of which are unaffected by the EPA’s requirements. Top holdings include Australia’s Aurizon and China’s Yanzhou Coal Mining. The ETF also yields a very respectable 2.03%, all for only 0.59% in expenses.
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%.
12. Terra Nitrogen (TNH)
While potash and phosphate prices have been falling this year, those fertilizer firms that produce nitrogen are thriving. That’s partly due to the fact that nitrogen-based fertilizer is synthesized from natural gas. The shale boom has made it cheaper and easier for firms like Terra Nitrogen to make their products. Add in accommodating government policies in key demand-driving nations, like India, and an MLP tax structure, and you have a win for shareholders.
Terra has been a monster performer over the last few years as natural gas has dropped to historic lows. Those lower feedstock costs have boosted profits, TNH’s share price and its dividend. Terra currently yields 7.86%.
13. Exxon Mobil (XOM)
Finally, no commodity dividend list can be had without including the elder statesman of the energy industry. Exxon Mobil continues to be the champion when it comes to production and finding new sources of crude oil supply. Its purchase of XTO back in 2010 was forward-thinking and basically set up the natural gas revolution. Likewise, its recent moves into Canada’s vast oil and liquid-rich shale will help spur another fracking revolution [see also 10 Ways to Invest in Fracking].
The firm’s dominant position in the energy sector provides plenty of cash flows to make acquisitions and boost dividend payments. Its continuous history of paying a dividend is a testament to that fact. Exxon currently pays a 2.57% yield.
Disclosure: No positions at time of writing.