Finding dividend stocks can be a challenge for any investor. Certainly, there are some industries that have historically been more obvious places to look, such as utilities and tobacco. But with investor sentiment relatively weak towards defensive shares, other industries may now offer impressive dividend prospects.
With that in mid, here are two companies which are highly dependent upon the outlook for commodity prices and the wider resources industry. Their valuations and dividend prospects suggest that they could offer investment appeal.
Reporting on Thursday was drilling solutions company Capital Drilling (LSE: CAPD). The business released a Q1 update which showed a slight decrease in revenue of 1.8% versus the final quarter of 2017. This was in line with expectations, as the company seeks to redeploy idle rigs to high-growth West African markets. Substantial progress was made on this front, with a total of 12 rigs arriving in the region during the period.
The company has been able to maintain a strong balance sheet in recent months, and seems to be well-placed for an anticipated uplift in demand. In fact, it is expected to post a rise in earnings of 34% in the next financial year. This puts it on a price-to-earnings growth (PEG) ratio of 0.4, which suggests that it offers excellent value for money.
Furthermore, Capital Drilling is set to post a rise in dividends per share of around 25% over the next two years. This puts it on a forward dividend yield of almost 4%, and suggests that it could become an attractive income share. Certainly, it may offer less stability than many income stocks in other sectors, but with dividend payments set to be covered twice by profit, it could prove to be a sustainable level of payout.
Also offering strong income prospects within a similar space is Rio Tinto (LSE: RIO). The FTSE 100 company has enjoyed a more positive period over recent months, with demand for iron ore being relatively buoyant after a challenging period. This has helped the company to deliver two consecutive years of bottom-line growth, which is set to have a positive impact on its dividend payments.
At the present time, the company has a dividend yield of around 5.5%. Clearly, this is likely to fluctuate depending on commodity prices and how profitable the business will be in future years. But with the stock having what appears to be a solid balance sheet and strong cash flow, it could be a strong performer over the coming years.
Furthermore, Rio Tinto trades on a price-to-earnings (P/E) ratio of 13. Given its competitive advantage in terms of a low cost base relative to sector peers and its high-quality asset base, this could prove to be a low price to pay. As such, from an income investing and growth perspective, the company’s shares appear to be worth buying now for the long term.
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Peter Stephens owns shares of Rio Tinto. 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.