I’d buy 175 shares of this lithium stock for £1,000 a year in passive income

This mining stock offers a tasty high-yield dividend. I think it looks sustainable and could provide solid passive income.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Electric cars charging in station

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Sociedad Química y Minera de Chile (NYSE: SQM) is a Chilean lithium miner whose name is often – thankfully – shortened to SQM. The stock has skyrocketed 74% over the last 12 months. Yet unusually it still carries a dividend yield above 8%. Let’s explore why I’d consider this share for passive income.

Explosive growth

SQM is a leading global producer of lithium, potassium, and other minerals and chemicals. Chile is home to the world’s largest reserves of lithium, a mineral that is key to the energy transition. And SQM has a 25% share of the global lithium market.

The price for the soft metal has soared over the last two years. This is due to pandemic-related supply-chain disruptions combining with a rise in the need for lithium-ion batteries in electric vehicles (EVs).

The impact on SQM’s financials from this demand has been spectacular. In its third quarter ended 30 September, the miner reported net income of $1.1bn (or $3.85 per share). That’s up from $106m ($0.37 per share) in the same period last year. That’s a 940% jump year on year.

Large dividend

This dramatic rise in profits this year has resulted in a doubling of the dividend, which now yields around 8.5%. That means if I were to buy 175 shares of this US-dollar-denominated stock today, I could be generating over £1,000 in annual passive income.

Of course, that’s assuming the dividend doesn’t get cut, which is an ever-present risk with any income stock. However, lithium prices remained high during October and November, so I also expect a strong Q4 from SQM. Plus, the company has nearly $4bn on its balance sheet, as of September.

Lithium risk

The Chinese battery giant CATL recently announced a new cell chemistry requiring no cobalt, nickel or lithium. It has talked up sodium-ion batteries, as sodium is more naturally abundant and therefore much cheaper than lithium.

But these batteries also have a lower energy density, which means a sodium-ion battery does not travel as far on a single charge as an equivalent sized lithium-ion battery. Therefore, as of today, they’re not commercially relevant. But it’s certainly a development worth monitoring.

Will I buy the stock?

SQM’s CEO Ricardo Ramos estimates that lithium’s “demand growth will be over 40% when compared to last year”. That’s why the company plans to significantly increase its production capacity over the next few years.

The price of lithium — and the company’s profits — may well come down in the medium term. But as the world shifts to clean energy, I expect long-term demand for the alkali metal to remain exceptionally strong.

Plus, SQM is a low-cost producer, which means the company uses economies of scale to produce its products at a low cost. This competitive advantage is likely to keep its profit margin high and support its dividend distribution.

So, am I going to buy shares? Yes. I plan to start a position in the stock as soon as I have free capital.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Ben McPoland has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Shot of a senior man drinking coffee and looking thoughtfully out of a window
Investing Articles

£20,000 in savings? Here’s how I’d aim for £14,710 a year in passive income

With spare savings, this Fool would start generating passive income for a more comfortable retirement. Here he details how he'd…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

£9,000 in savings? Here’s how I’d try to turn that into £581 a month of passive income

Relatively small investments in high-yielding stocks can grow through the power of dividend compounding into significant passive income.

Read more »

Photo of a man going through financial problems
Investing Articles

These are the FTSE’s biggest dogs over the last year!

The FTSE 100 has fallen far behind other major market indices over the past 12 months. However, these three sliding…

Read more »

Investing Articles

My top 3 stock market lessons from the Nvidia volcano eruption

Can we learn anything from the explosive rise in Nvidia's share price? Here are three Foolish reflections from this stock…

Read more »

Abstract 3d arrows with rocket
Investing Articles

Is boohoo the best near-penny stock to buy today?

This Fool asks why the boohoo share price has collapsed and whether now might be a good time to invest…

Read more »

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

A brilliantly reliable FTSE 100 share I plan to never sell!

This FTSE-quoted share has raised dividends for more than 30 years on the spin! Here's why I plan to hold…

Read more »

Asian man looking concerned while studying paperwork at his desk in an office
Investing Articles

This 7.7% yielding FTSE 250 stock is up 24% in a year! Have I missed the boat?

When a stock surges, sometimes it can be too late to buy shares and capitalise. Is that the case with…

Read more »

Investing Articles

£13,200 invested in this defensive stock bags me £1K of passive income!

Building a passive income stream is possible and this Fool breaks down one investment in a single stock that could…

Read more »