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Recession Ahead: Buy This Stock in the Depths of a Pullback

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As the recession talk continues to dominate the financial media, investors should begin to look at companies that you might want to own should the bottom drop out of the market.

High on the list sits a commodity company that pays a great dividend, has a simple business, and could have an explosive re-emergence should its stock fall on troubled times. 

This is a stock you need to look for if iron ore drops on a poor economic outlook. Labrador Iron Ore Royalty Corp. (TSX:LIF) is a great company with a simple business model, low debt, and a steady dividend.

The last time commodities took a beating, Labrador Iron Ore’s share price collapsed from $30 a share to less than ten dollars. The yield increased as the share price fell until the stock was paying a yield of almost 10% per share. 

The company is pretty simple. All it does is receive royalties from iron ore pellet sales generated by its 15.10% stake in Iron Ore Company of Canada (IOC) and through a wholly-owned subsidiary, Hollinger-Hanna Ltd. It essentially receives a 7% gross royalty and a 10 cent commission on all products shipped by IOC.

While the income is currently modest at 4% where it sits today, the beauty of this stock is the combination of income and capital gains you could receive if the stock were to fall as it did back in 2016 and rise on the back of a recovery. 

If you had bought this stock back in the depths of the commodity crunch, you would now be sitting on gains of around 300% while collecting a yield of around 10%. The entire time the stock continued paying the dividend, rewarding shareholders who stuck with it through the tough times. 

It’s not only the yield that makes this stock attractive. Another aspect of this dividend payment that is highly appealing is its unpredictable and unstable nature. Labrador Iron Ore has a habit of paying special dividends occasionally to reward shareholders. Some years the special dividends have almost doubled the dividend.

Of course, these are not steady dividend payments that increase steadily over time, so that might be a bit disappointing to some dividend investors. But the dividend with the possibility of occasional special dividends makes this a great trade for opportunistic investors.

Labrador Iron Ore also has no debt, a fact that makes this stock even more attractive as a trade, as its modest obligations allow it to ride out rough times while keeping the payout intact.

The bottom line

Labrador Iron Ore makes a pretty decent income stock if purchased at lower levels, but it can really shine as a trade if the commodity market, especially the market for iron ore, takes a turn for the worse. 

Its low debt, attractive yield, and the possibility of special dividends make holding onto the stock a fairly comfortable experience. And if you have the opportunity to purchase this stock at lower prices, say when the dividend is over 5%, you will also have the possibility for substantial capital gains.

Of course, this is a commodity stock. As anyone who has invested in commodity companies knows, dividends are never a sure thing. Labrador Iron Ore, however, is a better risk than most such companies should the entire sector experience a setback.

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Fool contributor Kris Knutson has no position in any of the stocks mentioned.

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