In the global quest for yield, it seems as though investors have labelled the whole resource space as ‘growth stocks’, and left them on the shelf.
Yet a quick scan through mining stocks shows resource stocks pay dividends too.
Some of them yield as much as 7%, 9%, or even 11%…
The Reserve Bank of Australia’s (RBA) interest rate cut to 2.75% last week took us to a historically low rate. Anyone funding their lifestyle from interest is going to find things harder than ever. Falling rates have forced investors into riskier assets in the search for yield.
We’ve seen this in the financial stocks, with the XFJ index exploding 45% in a year.
And we’ve seen it in industrials too. Smaller players have done very well. Veterinary business Greencross (ASX: GXL) has increased ten-fold!
But one place we haven’t seen yield-hunting is in resource stocks. There are a few hidden gems in the sector, and I expect it’s just time before the yield hunting army find them.
And it isn’t just Australian investors looking for yield on our market; it’s investors worldwide.
Since the start of the GFC, the Federal Reserve has slashed rates from 5.25% to 0.25%, and the European Central Bank (ECB) has dropped from 4.25% to 0.5%.
Everyone has been at it. In fact Bloomberg just reported that globally central banks have now made 511 rate cuts in this cutting cycle! There’s no end in sight, so investing in yield stocks looks like a good trade for the foreseeable future.
And like I said, there is plenty on offer in the resource space to tick that box.
One of my current stock tips is on a 5.5% fully franked yield at the current price. It also has a pretty robust track record. A yield is good, but a reasonably steady yield is even better.
There are a few things I look for in spotting resource stocks that will do well.
Cash is a big part of my analysis.
Do they have enough, do they need more, and do they have enough to pay dividends with?
The market is prepared to pay for stocks with cash flow, on the promise of dividends in the future.
And the market is prepared to pay even more for those that are actually paying dividends.
Buying by yield hunters should support the price of these stocks. But the rally that just started with the best week for resources in four years will also help.
The big-cap resource stocks are paying yields in the 2% range these days.
If you want the bigger dividends…you have to go smaller. Here are a few examples of what is available out there.
One company, Imdex (ASX: IMD)provides ‘drilling fluid products, advanced down hole instrumentation, data solutions and geo-analytics services to exploration, development and production companies in the minerals and oil and gas sectors worldwide.’
It’s a fact that some of the companies that profited most from the Australian gold rush were those who sold picks and shovels to the miners. Likewise, companies servicing the more recent mining boom did very well.
However, like most other mining services companies, Imdex has seen its share price tumble as the resource sector cooled in the last few years.
A lower price means a better yield. The result is a yield now around 7.2%, and the company has a pretty good track record of paying up. If resources stocks recover, then mining services companies are a leverage play on that.
But if you want a bigger yield than 7.2%, then you can’t look past the gold stocks.
One point Eric Sprott made when we chatted off camera in Hong Kong recently was that if gold stocks want to see their valuations rise, then they have to pay stronger dividends.
It’s true that they have had a poor track record in this department. However since gold’s historic smash, most gold stocks’ yield has risen. Even big-cap US gold producer Newmont (NYSE:NEM) is up to a yield of 4.3%.
There are a few Aussie goldies that stand to yield more today than a few months back. Kingsgate (ASX: KCN) is the leader of the field, now on a yield of 9.0%. They’ve been paying a dividend for most of the last decade through gold’s ups and downs. It may be harder for them to maintain the tradition this year. We’ll see.
But that’s not the biggest yield. Grange Resources (ASX: GRR) may have a chart like a falling stone, but it has been paying a few years of dividends now; at the current price, Grange’s yield clocks in at 11.4%.
Looking at dividend yield alone is just one step of many in researching a stock, so never invest on yield alone. In fact, if you want the biggest gains in the resource sector, the best time to invest is long before the stock pays a dividend.
But my point is this.
The central bank rate cuts ensure a flood of money is seeking yield.
There are many good-quality, dividend-paying resource stocks. So it’s inevitable that some of that cash will find its way into resource stocks that offer investors the yield they want. But for resource companies, the best gains will still come from capital growth in companies developing high grade projects.
Join me on Google+
Diggers and Drillers:
Why You Should Invest in Junior Mining Stocks
Ed Note: It’s not just banks and industrial stocks that pay dividends. A handful of mining stocks pay cash back to investors too. In today’s Money Morning Premium, Kris highlights one Aussie resource kingpin that’s trading with one of the best dividend yield’s it has seen in over ten years. Unless you think the resource sector is about to collapse, this is one to keep an eye on. Click here to upgrade now.
From the Port Phillip Publishing Library
Special Report: IT’S A TRAP
Daily Reckoning: New Australian Home Buyers Aren’t Convinced
Money Morning: ‘Best Week in Four Years’: Resource Stocks are Starting to Move…
Pursuit of Happiness: Don’t Take Financial Advice from a Lawyer
Dr Alex Cowie
Editor, Diggers & Drillers