Should You Scoop Up These 3 Stocks Yielding More Than 5% in Dividends? | Smart Change: Personal Finance

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(James Brunley)

If you’re into dividends, there’s certainly no shortage of big dividend yields right now. Although the average dividend-paying stock’s yield has been driven lower by similarly low interest rates, a handful of equities like Southern Copper (NYSE:SCCO), BHP Group Limited (NYSE:BHP)and Brazil’s Petroleo Brasileiro S.A. (NYSE:PBR)(NYSE: PBR.A) — you know it better as just Petrobras — aren’t in the same boat. These three stocks are sporting yields in the order of 6.3%, 10.3%, and 27%, respectively. That’s impressive for any environment!

Before plowing into any or all of these names just for their rich payouts, though, take a step back and look at the bigger picture. Not all is as it seems on the surface.

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These yields may be too good to last

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It’s easy for investors of all experience levels to fall into the trap of big yields without fully understanding what’s behind the numbers.

Take Southern Copper as an example. It dished out $3.20 worth of per-share dividend in calendar 2021, more than doubling 2020’s $1.50 per-share payout. Before you chalk up the big swing as a rebound from the pandemic-prompted headwind, though, know that 2019’s payments of $2.04 per share look more like 2020’s payouts than 2021’s. The huge payout bump largely reflects the doubling of the price of copper itself between the middle of 2020 and now. Indeed, copper prices reached record levels just last month, and this company’s started out the current year at the same brisk pace of quarterly dividend payments at which it ended last year.

There’s the rub, however. As exciting as the prospect of continued, well-funded payouts is, it’s uncertain Southern Copper will be able to safely keep making such payments. As of late last year and early this year, many major analytical outfits were calling for a contraction in copper prices in 2022 and only modest long-term price growth after that.

Most investors don’t fully see the risk yet, although the 7% slide in copper prices just since mid-April — against a backdrop of rampant inflation and rising interest rates — may be just enough to remind them commodity prices will struggle to persist at their recently lofty levels.

This dynamic also works against oil company Petrobras, of course.

Crude’s run-up from as low as $20 per barrel in March of 2020 to more than $100 last month has proven a windfall for the energy industry, and Petroleo Brasileiro has been no exception. Last year’s revenue was 56% better than 2020’s top line, driving a nearly identical improvement in EBITDA. Petrobras hasn’t been stingy in terms of sharing its newfound wealth, either. The company paid out $2.04 per share over the course of the last year, after paying practically nothing between 2018 and the end of 2020.

A big chunk of last year’s payout, however, is classified as a special dividend that was rooted in the company’s unexpected profitability. If oil prices don’t persist, the dividend as we know it won’t either.

Australia’s metals and coal mining outfit BHP is in the same situation. The stock’s payment of $1.50 per share for the first half of fiscal 2021 (ending in June) is record-breaking, but it also consumed 78% of the company’s operating profits of $14.8 billion. While iron ore prices are still well above where they were prior to the pandemic, we’ve seen extreme volatility on this front following its 170% price increase between 2020’s low and 2021’s high. Fitch suggests that iron ore prices should start to slide next year, en route to being cut in half of today’s by 2031.

Coal, copper, potash, and other minerals BHP digs up are facing similarly lackluster futures.

Count on the never-ending cycle

It’s a complicated matter to be sure. But that’s the point — this is the never-ending cycle within this sector.

See, unlike investing in most other dividend stocks, holding a dividend-paying commodity miner is as much a bet on the price of the commodity itself as it is on how well that company is managed. Indeed, it’s entirely plausible a metal miner or oil driller could do everything right and still suffer due to an uncontrollable and unforeseeable pricing headwind. It’s a nuance completely unique to the materials sector.

That bears repeating: This is a nuance completely unique to the basic materials sector… at least in the degree to which it affects performance. No investor can afford to ignore it.

Sure, these yields may be big despite all three of these stocks’ strong performances of late. Not even a resurgence of the pandemic or Russia’s invasion of Ukraine took a major toll on these seemingly vulnerable tickers.

All of this strength, however, appears rooted in the errant assumption that the aforementioned commodities will hold their current value. That’s just not how these businesses work. Within the materials arena, nothing invites more competition — or encourages the uptake of alternatives — like persistently high prices, which of course has the effect of undermining those prices.

Of course, there will come a time when this pendulum swings back in the other direction.

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James Brumley has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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