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Don’t be fooled by this miner’s uninspiring dividend yield

It’s important to look beyond yield to find stocks that will deliver top returns. And it’s for this reason that I thinkß long-term investors should not be put off by BHP Billiton (LSE: BLT), which offers an uninspiring dividend.

Ultimately, what matters most is a stock’s total return, both from dividends and capital gains. And it’s the combination of BHP’s dividend yield, dividend growth and capital appreciation, which makes the stock appealing to me. Not only is the company set to deliver robust earnings growth this year and steadily return more cash to shareholders, but it could be set to unlock value for shareholders as a new chairman takes over.

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A number of City analysts reckon that Ken MacKenzie, who is set to succeed Jac Nasser as chairman in September, will likely consider some major strategy changes, including opportunities to increase productivity via greater automation. MacKenzie has a proven record of delivering value for shareholders and a change of management could make it easier for BHP to review its legacy assets. And add in BHP’s lower valuation multiple than most of its mining peers, then the scope for capital appreciation looks substantial.

The current 3.4% yield may not stand out from the crowd, but the company’s strong free cash flow means its dividend outlook is attractive — analysts expect its forward dividend yield to rise to 5.3% by next year.

Of course, there are some major risks to consider too. There are growing concerns about the sustainability of the recovery in commodity prices amid slowing demand in global markets, and BHP may not follow up with many big changes to unlock value for shareholders.

But with the shares trading at just 11.5 times its expected earnings this year, I reckon that investors may have priced-in too much pessimism. Commodity prices may have eased a bit after a strong rally in recent months, but the pricing environment still looks a lot better than a year ago and BHP seems to be already past its rough patch.

Look forward

Kaz Minerals (LSE: KAZ), formerly known as Kazakhmys, is rapidly repairing its tarnished credentials as a well-managed copper miner. Investors need to look forward, not backwards, to see what’s in store.

Kaz is beginning to deliver the results where it counts, as it shifts its focus to developing its low-cost growth assets. Copper production increased by 16% to 52kt in the first quarter of 2017 as new mines ramp up production.

It plans to more than triple its 2016 production rate with the development of its Bozshakol and Aktogay projects. Once finished, these highly-mechanised open-pit operations will have highly competitive cost structures, with net cash operating costs of around $1.50 per pound — putting them in the lower third of the global cost curve.

Despite a 63% year-to-date gain in its share price, valuations look attractive. It trades at 9.9 times its expected earnings this year, and what’s more, by the following year, its forward P/E is expected to fall to just 6.2 times. However, don’t expect too much on the dividend front. With net debt of $2.55bn and a focus on ramping up production over the next two years, dividends are simply not a priority for the company.

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Jack Tang has no position in any 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.