The Most Promising Dividends in Metal Mining

Dividend payers deserve a berth in any long-term stock portfolio. But seemingly attractive dividend yields are not always as fetching as they may appear. Let's see which companies in the metal-mining industry offer the most promising dividends.

Yields and growth rates and payout ratios, oh my!
Before we get to those companies, though, you should understand just whyyou'd want to own dividend payers. These stocks can contribute a huge chunk of growth to your portfolio in good times, and bolster it during market downturns.

As my colleague Matt Koppenheffer has noted: "Between 2000 and 2009, the average dividend-adjusted return on stocks with market caps above $5 billion and a trailing yield of 2.5% or better was a whopping 114%. Compare that to a 19% drop for the S&P 500."

When hunting for promising dividend payers, unsophisticated investors will often just look for the highest yields they can find. While these stocks will indeed pay out the most, the yield figures apply only for the current year. Extremely steep dividend yields can be precarious, and even solid ones are vulnerable to dividend cuts.

When evaluating a company's attractiveness in terms of its dividend, it's important to examine at least three factors:

  • The current yield

  • The dividend growth

  • The payout ratio

If a company has a middling dividend yield but a history of increasing its payment substantially from year to year, it deserves extra consideration. A $3 dividend can become $7.80 in 10 years, if it grows at 10% annually. (It will top $20 after 20 years.) Thus, a 3% yield today may be more attractive than a 4% one, if the 3% company is rapidly increasing that dividend.

Next, consider the company's payout ratio, which reflects what percentage of income the company is spending on its dividend. In general, the lower the number, the better. A low payout ratio means there's plenty of room for generous dividend increases. It also means that much of the company's income remains in its hands, giving it a lot of flexibility. That money can fund the business's expansion, pay off debt, buy back shares, or even buy other companies. A steep payout ratio reflects little flexibility for the company, less room for dividend growth, and a stronger chance that if the company falls on hard times, it will have to reduce its dividend.

Peering intometal mining
Among metal miners, BHP Billiton (NYS: BHP) and Southern Copper (NAS: SCCO) sport the highest yields, at 2.7% and 2.2%, respectively. But a high yield should never be enough, especially if dividend growth is meager or payout ratios too steep. Southern Copper's payout ratio is a bit high, at 81%, but it's not at huge-red-flag level. Its five-year average annual dividend growth rate is significantly slower, at 9%, than BHP Billiton's 26%. Another contender, with a yield of 2.1% and a low payout ratio of 31%, is Freeport McMoRan Copper & Gold (NYS: FCX) . Its dividend growth rate is a healthy 10%.

If you focus on the dividend growth rate first, you'll end up with BHP Billiton and Cliffs Natural Resources (NYS: CLF) , with five-year average dividend growth rates of 26% and 21%, respectively. When growth rates are so steep, they can be hard to maintain for long. These have low payout ratios, though, making that far from an immediate concern.

You may notice, too, that some metal miners don't pay dividends. Thompson Creek Metals (NYS: TC) , for example, is a well-regarded powerhouse in molybdenum. You might be interested in it because of molybdenum's ability to strengthen steel and because of China's growing demand for it, but it just doesn't pay a dividend yet. Another non-payer of interest is Great Basin Gold, which is transitioning from being just a developer of gold mines to a producer, via mines in Nevada and South Africa. Once such firms grow bigger, have relatively predicable income streams, and don't have more productive uses for their excess cash, expect them to start paying dividends.

Just right
As I see it, BHP Billiton and Freeport McMoRan Copper & Gold offer the best combination of dividend traits, sporting some solid income now and a good chance of strong dividend growth in the future. Australian giant BHP Billiton offers a diversification bonus of being involved not only in mining, but also in energy production. Freeport, considered a stock that has it all, is expected to grow by double digits in the coming years. The fact that its most recent dividend hike was 67% also bodes well.

Of course, as with all stocks, you'll want to look into more than just a company's dividend situation before making a purchase decision. Cliffs, for example, has disappointed some analysts as it warned of lowered revenue projections. Still, these stocks' compelling dividends make them great places to start your search, particularly if you're excited by the prospects for this industry.

Do your portfolio a favor. Don't ignore the growth you can gain from powerful dividend payers.

Looking for someAll-Star dividend-paying stocks? Look no further.

At the time thisarticle was published LongtimeFool contributorSelena Maranjianholds no position in any company mentioned.You can follow Selena on Twitter@SelenaMaranjian.Click hereto see her holdings and a short bio. The Motley Fool owns shares of Freeport-McMoRan Copper & Gold. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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