High-yield dividend stocks are in a category of their own. Unlike growth stocks, whose often lofty valuations are rooted in what the business could grow to become over time, the investment thesis for top high-yield dividend stocks is grounded in the existing business's strength and ability to generate stable earnings and cash flow to support a growing dividend.
Southern Copper (SCCO -1.74%), Rio Tinto (RIO -0.83%), and Hannon Armstrong (HASI 0.91%) all have attractive positions in their respective markets and pay sizable dividends. Here's what makes each company a great buy now.
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Southern Copper, and the case for copper
Lee Samaha (Southern Copper): The case for copper is a strong one. Demand for the metal is traditionally seen as correlated to the global economy, so as growth improves in 2022 and beyond, so should copper demand.
In addition, copper's usage in electrical products makes it a primary beneficiary of the trend toward electrification in the global economy. For example, electric vehicles require four times more copper than internal combustion engine vehicles. Moreover, investment in renewable energy implies a step up in copper demand as it usually means investment in transmission and distribution and copper used in storage capability.
That's the brief case for buying copper, and by definition, copper miners. That said, Southern Copper has underperformed its peers like Freeport-McMoRan over the past year.
Data by YCharts
The reason for the underperformance comes down to the market's fear over the regulatory environment in Peru. The company's principal operations are in Mexico and Peru, and investors are worried by events such as protests and blockades at one of Peru's largest mines. In addition, there are fears of the government raising taxes and royalties on miners.
Still, a large part of the reason for these potential governmental actions is because copper prices have risen (good for Southern Copper on the whole). Moreover, given that copper is Peru's major export, it's hard to think any rational government will damage investment in its key industry.
Therefore, if you are comfortable with some country-specific risk, and you like the case for a long-term rise in the price of copper, then Southern Copper is a great way to get some hefty dividends.
Dig into this lustrous dividend opportunity
Scott Levine (Rio Tinto): With a market cap of $124 billion, Rio Tinto is one of the largest mining companies available to investors. But it's not only its large market cap that's noteworthy -- the mouthwatering forward dividend yield of 9.3% also warrants attention.
Operating in more than 30 countries, Rio Tinto provides exposure to a variety of metals including iron ore, aluminum, and copper. While investors wait for the company to report its fourth-quarter earnings, there was encouraging news this week. Rio Tinto and its partner, Turquoise Hill, reported that they reached an agreement with the government of Mongolia regarding the Oyu Tolgoi mine. And in late December, the company announced it had entered into an agreement to acquire the Rincon lithium project in Argentina, consistent with its strategy to grow its battery materials business.
Rio Tinto's high dividend yield may raise a warning flag for investors who worry that the high distribution is placing the company's financial well-being in jeopardy; however, this is hardly the case. Over the past three years, Rio Tinto has averaged a conservative payout ratio of 59%. In addition, the company's dividend is well covered by its free cash flow. From 2016 through 2020, for example, Rio Tinto has returned an average annual distribution of $2.82 -- an amount far below the average free cash flow per share of $4.21.
And it's not only dividend-hungry investors that will be attracted to Rio Tinto; bargain hunters will also find the stock compelling. Currently, shares of Rio Tinto are changing hands at five times operating cash flow, representing a discount to its five-year average ratio of 7.3. Prefer the old price-to-earnings metric instead? The stock still looks cheap. It's valued at 6.4 times trailing earnings -- notably lower than its five-year average P/E ratio of 30.
Generate passive income by investing in carbon reduction
Daniel Foelber (Hannon Armstrong): Like many renewable energy stocks, Hannon Armstrong had a banner year in 2020, producing a total return of 106%. A total return includes both the stock price appreciation and dividends.
However, since Jan. 1, share prices of Hannon Armstrong have produced a total return of -38.5% as the renewable energy sector comes under pressure. Faced with a saturation of investment, rising interest rates, and ongoing supply chain challenges that are raising costs, the cyclical nature of renewable energy presents a period of slowing growth in the short to medium term. But over the long term, the investment thesis for renewable energy remains brighter than ever.
Utility-scale solar and wind projects are now cost competitive with fossil fuels. Many companies have pledged net-zero carbon emission goals by 2050, and several have many further goals to reduce their environmental impact by 2030 and sooner. There's a shift away from profits as the only performance parameter and more emphasis on environmental, social, and governance (ESG) metrics, too. Supporting this new era of business practices are companies like Hannon Armstrong that invest in environmentally beneficial projects. The company has been around since the early 1980s, but it's really starting to hit its stride now that environmental investment is being seriously considered in sectors outside of energy and industrials.
The company's business model is simple. It passes along its investment gains to shareholders through a stable and growing dividend and by reinvesting excess earnings into the business. The company expects to grow its dividend per share between 3% and 5% over the next three years and grow distributable earnings per share between 7% and 10%. Hannon Armstrong currently pays a quarterly dividend of $0.35 per share, representing an annual yield of 3.7%.
