What factors lead to a good dividend investment? I like to see a high-yielding stock backed by a steady, cash-generating business. And some of the best dividend investments often have a multi-year record of rising revenue, earnings, operating cash flow and shareholder dividend payments.
On top of that, I reckon a decent level of yield is desirable right away. So, companies yielding between 3% and 7% can be interesting and worthy of further research.
FTSE 100 dividends from BHP
For example, FTSE 100 mining company BHP (LSE: BHP) has a forward-looking dividend yield of just above 5% for the trading year to June 2022. And today’s half-year results report contains some impressive figures. Compared to last year’s half-time performance, underlying earnings per share rose 16%. And the net operating cash flow increased 26%. The directors increased the interim dividend by 55%. Right now, things are going well for BHP.
Looking ahead, the company reckons the outlook for global economic growth and commodity demand “remains positive.” The directors mentioned in the report that policymakers “in key economies” have been committing to growth. And there’s a desire to tackle climate change. BHP reckons those factors will likely drive growth in demand for energy, metals and fertilisers. And factors such as population growth and rising living standards will help demand as well.
BHP deals in commodities such as copper, iron ore, coal, nickel, and oil. And the market prices have been robust for most of them lately. If BHP’s outlook assessment proves to be correct, commodity prices could remain strong for some considerable time. And that could lead to high earnings for the company.
However, BHP runs a cyclical business. And bigger earnings may not always translate into progress for the share price. For example, I’m mindful of the recent performance of the London-listed bank stocks.
The rollercoaster of cyclicality
The banking sector is cyclical too. And leading up to the Covid crash, bank shares spend around a decade moving sideways, even as their annual earnings continued to rise. Instead of bank share prices rising to account for higher earnings, their valuations gradually contracted instead. And those bank stocks found it hard to make upwards progress.
I reckon through that ‘wilderness’ period for bank shares, the stock market was waiting for the next cyclical down-leg. So investors didn’t allow the shares to rise too much. And the method of achieving that was valuation compression. And it makes sense. The pandemic caused a dramatic crash, but cyclical businesses always cycle down again in the end.
And that’s why I’m cautious about the big mining companies. BHP is enjoying a period of fat profits now. But profits, cash flows, shareholder dividends and the share price have a history of volatility with big swings up and down. And near 2,270p, the stock is near the top of a 10-year trading range.
BHP doesn’t meet my criteria for a decent, long-term dividend-led investment. Rather than leading my analysis by considering the dividend yield, I prefer to consider the firm’s cyclicality first. Of course, the stock may shoot up from here and deliver shareholders with decent dividends for years to come.
But I’m watching from the sidelines for the time being.
