Add to your long-term returns in the resource sector by investing in mining stocks that pay dividends

At TSI Network, we keep a sharp eye out for high-quality mining stocks that pay dividends.

Dividends are typically cash payouts that serve as a way companies share the wealth they’ve accumulated through operating the company. These payouts are drawn from earnings and cash flow and paid to the shareholders of the company. Typically, these dividends are paid quarterly, although they may be paid annually or even monthly.

Dividends can now contribute up to a third of your long-term investment returns, without even considering the tax-cutting effects of the dividend tax credit. In addition, dividends are far more reliable than capital gains. A stock that pays a $1 dividend this year will probably do the same next year. It may even increase its dividend payment.

Many investors buy gold stocks as a hedge against inflation, and some gold stocks pay dividends. But there are other mining stocks that also offer an inflation hedge—and on average pay higher dividends.

Copper stocks generally have higher dividend yields than gold stocks because they have steadier demand and more stable prices. As well, they’re usually much cheaper than gold stocks in relation to their earnings and cash flow. That means they potentially have less room to fall if markets in general fall. That’s also another way of saying that they can be less risky than gold.

Long term, copper should gain from rising demand and tighter supply. Major deposits are depleting, and environmental issues are holding back new mines.

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Nutrien (symbol NTR on Toronto) is one of our favourite Canadian dividend paying mining stocks. The company is the world’s largest producer of agricultural fertilizers, including mined potash. It took its current form on January 1, 2018, when Agrium Inc. (old symbol AGU) merged with rival Potash Corp. of Saskatchewan (old symbol POT). The stock is well-suited to income-seeking investors. The company has increased its dividend by an average of 5.8% annually in the past five years. That dividend yields 3.4%.

4 ways you benefit when you invest in mining stocks that pay dividends

1. Growth and income. The best dividend-paying stocks offer both capital-gain growth potential and regular income from dividend payments. In fact, dividends are likely to still be paid regardless of how quickly the price of the underlying stock rises.
2. Dividends can grow. Stock prices rise and fall, so capital losses often follow capital gains, at least temporarily. Interest on a bond or GIC holds steady, at best. But top dividend paying stocks like to ratchet their dividends upward—hold them steady in a bad year, raise them in a good one. That also gives you a hedge against inflation.
3. Dividends are a sign of investment quality. Some good companies reinvest profit instead of paying dividends. But fraudulent and failing companies are hardly ever dividend paying stocks. So if you only buy stocks that pay dividends, you’ll automatically stay out of almost all the market’s worst stocks. For a true measure of stability, focus on those companies that have maintained or raised their dividends during a recession and stock-market downturn. That’s because these firms leave themselves enough room to handle periods of earnings volatility. By continually rewarding investors, and retaining enough cash to finance their businesses, they provide an attractive mix of safety, income and growth.
4. Dividend income gets favourable tax treatment. Taxpayers who hold Canadian dividend-paying stocks get an additional bonus. Their dividends can be eligible for the dividend tax credit in Canada. This means that dividend income will be taxed at a lower rate than the same amount of interest income (investors in the highest tax bracket pay tax of 30% on dividends, compared to about 50% on interest income). Investors in the highest tax bracket pay tax on capital gains at a rate of roughly 25%.

How much mining stocks that pay dividends have you added to your resource portfolio? Have they been profitable for you? Share your experience with us in the comments.

This article was originally published in 2016 and is regularly updated.