People can make a lot of money in commodities, but they can lose a lot of money as well. If you’re in at the wrong time, as was the case in the commodity downturn a couple of years ago, you can get wiped out. But if you get in at the right time, you can make quite a lot of money on these stocks. Many of the companies that destroyed wealth during the commodity downturn have bounced back significantly, leaving investors to wonder if there is still money to be made given their huge runs.
In order to mitigate potential timing errors, it can be beneficial to buy ones that pay dividends. When these stocks have dividends, the wild commodity ride can be a little more bearable. Companies like Labrador Iron Ore Royalty (TSX:LIF), Teck Resources (TSX:TECK.B)(NYSE:TECK), and Cameco (TSX:CCO)(NYSE:CCJ) pay dividends and have some upside potential for capital gains. Are these companies worth investing in now, or would an investor be better off avoiding these stocks altogether?
Labrador Iron Ore
If you’re looking for a bigger dividend, then Labrador Iron Ore is probably the stock you want to buy of the ones listed here. The biggest issue this company faces is that it is wholly dependent on the Iron Ore Company of Canada, one of Canada’s largest iron ore producers, for its revenues. But in spite of its lack of diversity, the company kept its dividend intact at a time many other companies cut theirs when commodity prices declined. This is mainly due to its debt-free status, which allowed it to weather tough times.
Labrador Iron Ore had been paying dividends for many years. At the current market price, the company pays a dividend of 4%. While this is not a massive dividend, Labrador Iron Ore has been known to pay out a special dividend from time to time. As its cash pile is building once again, it may pay one again sometime in the future. And while its price has recovered considerably — Labrador Iron Ore was trading at around $6 a share and has since recovered to its current price of about $24 a share — there may still be some upside to this stock.
Now in stark contrast to Labrador Iron Ore, Teck is very diversified by product and geography. Teck is not a company for the faint of heart, as it can fall quite precipitously in a downturn. Only a few years ago, it traded at about $5 and is now back up to $32 and may have more capital gains yet to come. The company has operations in Canada and internationally in countries such as the United States, Chile, and Peru.
Teck’s dividend is quite low at less than 1% — the result of a large cut aimed at conserving capital when prices were so low. With recovering prices, investors might be fortunate to see a return to higher dividends, although this is not a guarantee. What Teck does offer is geographically diversified mining operations as well as exposure to coal, copper, and other metals.
Cameco is interesting in that its share price, as opposed to the other commodity companies mentioned here, is still quite low historically. Cameco is one of the largest uranium producers in the world. Its global operations offer investors a diversified revenue base. It also offers nuclear fuel processing services, further diversifying its revenue stream.
The company has a decent balance sheet and pays a dividend of about 2% at the current share price. The problem with Cameco is the negative sentiment towards nuclear fuel in recent years, a view that has negatively impacted the share price over the past few years. That being said, the stock has only just started to move off its lows and may have more upside potential than Labrador Iron Ore or Teck.
The bottom line
These stocks provide an interesting mix of diversification, dividend stability, and capital appreciation potential. Probably the best strategy would be to buy some of each to benefit from their different attributes and risk profiles. However, if you had to choose one, I would probably choose Cameco since it has a good dividend, a solid balance sheet, and probably has more upside potential given its share price is still sitting at a low level. If nuclear pessimism were to clear, its shares could see significant price movement.
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Fool contributor Kris Knutson has no position in any of the stocks mentioned.