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2 Stocks for the Income Investor: Agrium Inc. and Suncor Energy Inc.

It is no secret that in Canada, the majority of the high-dividend-paying companies come either from the telecommunications or financial sectors. Just like capital appreciation portfolios, diversification is important for income portfolios too.

That being said, here are two companies exposed to commodity resources that warrant a place in any income investor’s portfolio.

Suncor Energy Inc.

Disciplined investments, a shareholder-oriented culture, and high barriers to entry make this integrated oil company a strong contender for any income investor.

In the last five years, Suncor Energy Inc. (TSX: SU)(NYSE: SU) managed to increase its dividend by 34% to an estimated $1.02 per share in 2014. This is amid the lower capex announced by management last quarter and the decision to increase shareholder returns through both accelerated share buybacks and further dividend increases.

This is positive news, but not so positive for companies operating in sectors that are prone to intense competition, as their dividends might be at risk. This is not the case for Suncor, as its operations revolve mainly around the oil sands in Canada. Not only are there intense political barriers to entry given the regulation necessary to operate in those fields, but there are also natural barriers to entry in the shape of limited mines available for development. Technology is also a big factor in protecting the future income of the operating businesses already in the oil sands.

All these factors are enough to ensure there won’t be dozens of competitors in the future coming to exploit the oil sands where Suncor operates.

Agrium Inc.

The second commodity-exposed dividend income stock is Agrium Inc. (TSX: AGU)(NYSE: AGU). This company is involved in the production of fertilizers and other products for farmers. While not as robust in terms of barriers to entry as Suncor, throughout the years there has been an important consolidation of companies in this sector, as well as the creation of cartels like Canpotex Limited.

Like Suncor, Agrium’s management has increased the dividend substantially in the past five years. Indeed, the company’s dividend has increased 90% since 2009, giving investors a current yield of 3.22%. While this is nowhere near close to BCE Inc.’s 5% yield, we have to remember that just as in capital appreciation portfolios, income investors must diversify their income-generating companies. A 3.2% yield from a company operating in a cyclical business is excellent, and the underlying macro factors are promising for the future.

Indeed, the United Nations estimates that the world’s population will increase by three billion by 2045, which means that the world needs to double its food production. Add to that the ever-growing middle class in emerging markets that will require a diet closer to what we have in the developed world, and you can easily guess that the underlying economics of Agrium’s business are really healthy for the long term.

The bottom line

Just as investors looking for capital appreciation should not put all their money int0 the same stock, neither should those looking for income.

Instead, investors should focus on building a strong and properly diversified foundation consisting of dividend-yielding stocks spread out across many different sectors. That way you can mitigate the risk of volatile streams of income.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor François Denault has no position in any stocks mentioned. Agrium is a recommendation of Stock Advisor Canada.

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