Over the 25-year period from June 1993 until November 2018, the average annual dividend returned by FTSE 100 companies was 3.47%.
As an investor seeking to mitigate the impact of increasing inflation, an investment in a high-dividend-yield mining company like BHP Group (LSE:BHP) may provide me with a degree of comfort and protection.
Globally, there has been a strong and consistent demand for metals and commodities, particularly from an energy sector pivoting towards investment and development in renewable technologies. This demand has resulted in the spot price of copper more than doubling from March 2020 ($2.13lb) to hit its peak in March 2022 ($4.69lb), although it has receded in recent weeks by over 20% to serve as a gentle reminder of the volatility of commodities.
Unsurprisingly, the share price of BHP has trodden a similar path to the copper prices since March 2020, where it started its meteoric ascent from 1,054p to a lofty peak of 3,019p in late March 2022. With such tight correlation to the price of copper, however, it should come as no surprise to see BHP lose similar ground in recent weeks with its share price also receding by approximately 20%.
Mining stocks have historically been viewed as cyclical, with the traditional wisdom being that demand for raw materials and commodities falls during recessionary periods, dragging down mining share prices with them. So, with the UK teetering on the edge of a recession, it is worth considering whether BHP still presents an attractive case for investment.
Well, the current dividend speaks for itself, with BHP delivering a mouth-watering 11.5% yield. However, since I seek capital growth as well as sky-high dividends, the investment appraisal is not straightforward.
Volatility in the commodities market, in particular copper, continues to drive volatility in share prices in the mining sector. BHP stands out from the mining crowd, however, in its efforts to diversify its portfolio through exposure to the potash market, which could provide me with mitigation against market volatility whilst also providing the opportunity for significant returns on my investments in the future.
Potash is a potassium-rich crop fertiliser. Previously, 40% of all supplies of potash originated from Russia and Belarus; however, this supply has now been choked as a result of economic sanctions in response to the Ukrainian conflict.
Over the last five years, potash prices have bumbled along between $200-$250 per tonne, but as soon as Russian soldiers set foot in Ukraine, that price rocketed to $562 per tonne, where it has stayed ever since. Irrespective of how the current Ukrainian conflict plays out, there is little doubt that the Western economies will continue to reduce their reliance on the supply of Russian commodities.
In response, BHP is already reshaping its portfolio of projects by seeking to capitalise on the demand for potash by recently approving a £5.6bn investment in the Jansen Stage 1 project in Canada that will be capable of delivering 4.35 million tonnes of potash per year from 2027 onwards.
Whilst the current BHP dividend yield of 11.5% is hard to ignore, the seeds of the recent Jansen Stage 1 investment are not due to bear fruit for another five years, so this cautious investor plans to sit and wait until I can see some green shoots of growth from BHP’s potash strategy!
