I have talked openly about the increased costs I am facing day to day. Aren’t we all? As such, my attention has turned to dividend stocks. Indeed, I have been considering how my investment portfolio can yield a greater level of income than I currently receive.
While high inflation expectations still abound, it would be ideal if my portfolio could yield a better income return. I know this is not the easiest ask across the FTSE 100 index, however. For example, its dividend yield stands at just 3.7%. Once I take into the account the current rate of UK inflation (10%), my real income return is -6.3%.
I invest to make more money, not less. So, which sector can offer me the best prospect of high, inflation-beating, long-term income?
Mining for high dividends
Two mining dividend stocks have caught my eye for the level of income they have been paying investors this year. They are BHP Group (LSE:BHP) and Rio Tinto (LSE:RIO).
In BHP’s case, the Anglo-Australian mining company has form with paying mammoth dividends. If I buy the shares now I will be in time to receive the next upcoming dividend payment. Analysts at Credit Suisse have predicted that BHP’s annual 2022 dividend yields could be as high as 16.2%, and 15.5% in 2023. I believe this indicates some great long-term prospects.
Though Rio Tinto has a higher current dividend yield than BHP (11.7%), I think this is due to the fact it enjoyed its highest interim profits ever reported during 2020 and 2021. So, it is likely I may have already missed the dividend gravy train. Particularly as iron ore, a key part of its business, has been falling in price.
Reliable income payer
BHP is known to pay high dividends when metal prices are up. But at the same time it is not afraid to cut back when commodities are doing less well. It consistently has a dividend coverage ratio of around 1.5 times or more. This strikes me as a reliable income payer over long periods of time, even amid market volatility.
The company’s payout ratio is much more consistent than that of Rio Tinto.
A dividend stock with capital upside
The common theme with these mining dividend stocks, is that their profits have been boosted by higher commodities price for metals in recent times. These factors have lifted their dividend payouts to investors.
I consider this to be a short-term phenomenon. Good short-term performance is not enough to justify inclusion in my portfolio. So, which of these stocks offer me the best value in the long run?
BHP Group, with a price-to-earnings (P/E) multiple of 4 times, is offering slightly more value than Rio Tinto (5.1 times). Both stocks look cheap to me when compared to copper miner, Antofagasta (15.7 times).
In this sense, I believe BHP, out of all the other mining stocks, looks like the best long horizon choice for me. It can offer me high, reliable income, above inflation, as well as the prospect of capital growth.