Can Investors Depend on Potash Corporation of Saskatchewan Inc.’s 7% Yield?

Because of future demand increases, a drop in costs, and the fact that the company has enough money to cover the dividend, Potash Corporation of Saskatchewan Inc. (TSX:POT)(NYSE:POT) is safe.

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Whenever a yield gets unusually high, such as with Potash Corporation of Saskatchewan Inc. (TSX:POT)(NYSE:POT), you have to wonder whether or not the company will be able to pay that yield to its investors.

It’s my belief that investors are in a fine position with Potash Corp. and, in actuality, this recent drop in price is a solid opportunity for investors. Here are a few reasons to support that argument.

1. Demand for potash will increase

Things are going to be tough for the company because there is a lot of supply of potash. However, what puts Potash Corp. in a good position is the fact that it is such a low-cost provider, so it will be able to withstand these next few years.

The long-term demand for potash, though, could be significant. With India and China developing a large middle class, people are going to require high-quality food. To ensure that demand can be sustained, farmers will need high-quality fertilizers. Potash is a needed ingredient for these fertilizers.

2. Big investments are coming to an end

Part of what was holding the balance sheet down was the fact that the company had initiated an incredibly ambitious investment strategy in 2003 that resulted in $8.4 billion being spent to increase production. This investment is finally coming to an end with the company increasing production to 18 million tonnes.

This is important for two reasons. The first is because it gives Potash Corp. even more supply for when demand does start to increase. The other reason is because operating costs drop as these investments come online. That means that the company will be able to generate more cash flow.

3. The dividend is safe

For right now, the dividend is relatively safe. It pays US$0.49 per quarter, which gives it a 7% yield. Fortunately, the company makes enough money to cover both the dividend and its operational costs even with prices where they are.

If prices were to drop below $200 per tonne for a prolonged period of time, I could see the dividend getting cut. However, the company is a consistent-paying company. It has paid a dividend every quarter since 1990.

Should you buy?

I say yes. The price is reasonable, a lot of costs are going to finally disappear, and the dividend is incredibly lucrative. Therefore, buying this stock for the future could be one of the best investments you make. And with its 7% yield, the added income increases the safety of the stock.

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 Jacob Donnelly has no position in any stocks mentioned.

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