- The three highest dividend payers on the London market are miners and this could be attractive for income seekers
- However, miners are subject to revenue squeezes if the price of their production falls
- It might be better to move down a level to the other sin stocks
Investors looking for income have had very little to cheer about this past decade what with interest rates being on the floor. There’s thus a temptation to simply grab dividend yield when it’s available. This could be true of Evraz PLC (LON: EVR), BHP Group Ltd (LON: BHP) and Rio Tinto PLC (LON: RIO) which are, respectively, on 14%, 10% and 10% dividend yields. Even better, AJ Bell the stockbrokers thinks they could be, given predicted dividend changes, on 17, 11 and 10 percent prospective yields for the coming year, 2022.
This does look good for income investors. However, there is always that little difficulty that the future is not entirely known. Events can indeed happen. One of which is that the sales price of minerals and ores can change which rather affects the net revenues of miners. Costs of production don’t change much with the market price of output while clearly, the price gained from that output does. Miners are thus highly geared to the market value of their production.
Also Read: 3 EV Stocks For Your 2022 Portfolio
The big issue here for these three is the iron ore and steel price – the second has more influence at Evraz than at the other two. If those output prices fall then so too will profits. It’s possible for profits to fall enough that so will the dividend. Yes, companies don’t like cutting the divvie and all that but it is feasible. We might at this point not that the iron ore price is 50% off its recent high and think that what we’re seeing in the accounts is that past high price, not the coming future.
This then gets complicated as most of this iron ore – and steel – production is not sold on the spot market which is that price we’re looking at. Rather it’s sold on medium-term contracts which tend to lag the iron ore price on the way up and also down. So the effect of recent high prices could still be digesting its way through the mining company accounts.
Exactly what those future dividends are going to be is not known with perfect certainty. And what they will be like in 2023 and beyond is more uncertain.
It might therefore be that income investors would do better looking down a level. Look to the proper sin stocks (miners are only a recent inclusion onto that list given the new fashion for ESG investing) like tobacco. Imperial Brands PLC (LON: IMB) and British American Tobacco PLC (LON: BATS) both yield around 8%. But those two companies have pricing power over their products and are well protected against inflation too because of that. They produce a lower yield, but perhaps one that is safer. It’s also necessary to desire the yield and income more than any qualms about investing in tobacco of course.
High yields are, for income investors, desirable. But how long those yields are going to remain becomes an important question.