The basic materials sector is relatively small when you consider solely dividend paying companies. This is explained by the highly cyclical and volatile nature of the sector. The price of many commodities fluctuate a great deal and it makes it very difficult for management to plan steady and increase dividend payouts.
On top of that, exploiting resources require lots of capital and are mostly long-term projects. Therefore, most capital is used to fund additional projects, pay down debts and ensure the company’s sustainability during challenging periods. Nonetheless, it doesn’t mean you can’t find a good dividend payer to diversify your portfolio. Check out the full list here and you might be surprised to find some healthy 4% yielding stocks:
Where is the dividend growth?
Most companies are continuously looking for more projects to expand their production at lower prices while the demand market varies according to various sectors. In the 2000’s, basic material reached their climax as emerging markets were eating out all resources. This opened the door to massive expansion projects. Unfortunately, those kind of investing cycles often leads to overproduction periods once the demand slows down.
More recently, it has become more difficult as most emerging markets (the biggest consumers of basic materials in the past decades) have seen their appetite reducing. China, Russia and Brazil are in the middle of economic slowdowns. It is very difficult for anybody outside China to know if their GDP is growing or not as they continuously hide numbers and make up new calculation methods. Russia has been severely hit by the oil turmoil since 2014 while Brazil’s taste for grand projects, such as hosting the World Cup and the Olympics, has divided the country and created more debts and corruption than ever. Nevertheless, the sector has been able to come back after each hit over the past 10 years:
You clearly see on the above graph that the basic material trends has been on the upper part of the cycle since 2016. While I don’t believe in timing the market, you may want to wait until this sector is in a downturn before making investments. Dividend cuts are not unusual in this sector as it is obviously more important to ensure the survival of the company than rewarding shareholders for their patience.
Basic Materials dividend paying stocks list
You obviously can’t build your portfolio solely on basic materials, but if you are looking for additional growth potential, you might find it here. There are some interesting industries such as chemicals and agricultural inputs providing solid business models. To build this list, we only considered the best dividend payers with a history of at least 5 years of dividend growth. While this methodology cut lots of poor dividend investing choices, it also keeps out a great company that was recently formed: Nutrien (NTR / NTR.TO).
Nutrien is the result of a merger of equal between Agrium, Canada’s largest global retailer and distributor of crop inputs and Potash, one of the world largest potash producers. Nutrien is a provider of crop nutrients, inputs and services. The company produces and sells potash, nitrogen and phosphate products for agricultural, industrial and feed customers. The company’s main focus is of potash sales.
The mergers of Potash and Agrium gave us a new stock to analyze in Nutrien. We now have a giant in the crop nutriment industry. The company declared its first dividend of $0.40/share (for a 2.54% yield) in February (payable in April). Their first results were positive, driven by strong retail growth (coming from Agrium). Management expects to realize $500M in synergy throughout 2018.