Should FTSE investors buy BHP or Rio Tinto shares in February?

Markets have been volatile in the past few days. If you are nervous about your portfolio, you may want to consider buying into FTSE 100 dividend stocks that may potentially help you weather further choppiness.

Today, I’d like to discuss two companies with robust dividend yields that provide exposure to the resources sector.

BHP 

Headquartered in Melbourne, Australia, BHP (LSE: BHP) has diversified operations in four segments: coal, copper, iron ore, and petroleum.

It purchases and operates long-life, large commodity-producing resource assets such as coal mines or iron quarries. Its portfolio of assets, which is considered amongst the highest quality in the world, has been generating significant free cash flow for BHP.  Analysts emphasise that copper, in particular, has especially good fundamentals that look set to continue for many years to come.

Management has also been diligent about debt reduction, which has translated into cash returns to investors. With a current dividend yield of 5.1%, and a trailing price-to-earnings ratio of 15.6, the shares appear to offer good value for money. 

Rio Tinto

Another option to consider in the resources sector is Rio Tinto (LSE: RIO). The group also owns a number of world class assets across several different commodities.

Like BHP, the mining giant has generated strong free cash flow over the last few years and returned the majority of it to shareholders through dividends and buybacks.

If iron ore prices remain favourable in the near term, I’d expect management to be in a position to reward shareholders with generous dividends again in the new year. 

My colleague James McCombie has recently highlighted that over the past decade your total return on RIO  shares“would have been 8% on average each year”. 

At the time of writing, the stock supports a dividend yield of 6.0%. Moreover, the shares are trading at a trailing P/E ratio of 6.9. This seems to suggest that the stock offers an acceptable margin of safety at current levels.

What could derail these two stocks?

While it’s almost impossible to completely avoid the impact of a recession or a deep correction on a portfolio, it is possible to minimize it by buying high quality stocks that pay regular dividends.

However, you should also remember that volatility in commodity markets affects the prices of these resources that both of these companies sell.

Since the last financial crisis of 2008/09, commodity cycles have become mostly China-driven. Therefore, if future months show a decline in Chinese demand for commodities, bottom lines of these companies may also be affected. 

After the US, China is the world’s second largest economy. So markets pay attention to any news headlines that may have a China component. However, if history is any guide, markets tend to recover from such headlines that may cause short-term profit-taking.

Furthermore, stocks of international companies like BHP Group or Rio Tinto can be particularly attractive for UK-based investors, because their fortunes don’t depend on our economy. As such they’d be immune from any further turbulence we may have due to the upcoming trade negotiations with the EU. The signing of the the U.S.-China phase one trade deal has also been good news for both companies.

Therefore, I’d regard any potential price drop in either BHP or RIO shares as an opportunity to buy into either company.