If you’ve £10,000 to invest in income stocks and don’t know where to start, I highly recommend taking a closer look at global mining giant BHP (LSE: BHP).
What I love about BHP is that, after around five years of restructuring and cutting costs, it’s now spitting out cash at an impressive rate. For example, according to the company’s numbers for its financial year ended 30 June, net operating cash flow came in at an impressive $17.4bn.
Free cash flow, which what’s left for shareholders after things like capital spending, was $10bn (around £8.2bn). That’s compared to BHP’s current market capitalisation of £85bn.
This cash generation, coupled with the fact the mining group’s net debt has declined from around $27bn in 2016 to $9.2bn today, allowed management to declare a record final dividend totalling $1.3bn for the year.
Cash flow giant
As long as BHP continues to do what it does best (pull rocks out the ground) and doesn’t get sidetracked by any costly expansion plans, I reckon it’s highly likely the company will continue to throw off cash for many years to come.
City analysts believe the stock with yield 7% this year and also 6.2% next year, although these figures are based on regular dividends. As the company demonstrated earlier this year, it’s not averse to paying out special dividends when the time is right, so the actual level of income declared could be higher. That’s why I think this stock is worth a place in your portfolio today.
I’m also excited by BHP peer Rio Tinto’s (LSE: RIO) cash generation. City analysts currently believe this iron ore miner will report earnings growth of 43% for 2019 off the back of high iron ore prices and better margins. They’ve pencilled in earnings per share of $6.50 for the year, compared to $4.60 for 2018.
Rio could return almost all of this to investors, the City reckons. With a relatively clean balance sheet (net gearing of 12%) and limited capital spending demands, Rio can afford to return as much as $4.60 to shareholders in 2019, according to the City’s spreadsheets. That gives a dividend yield of 9.2% on the current share price.
Unfortunately, analysts reckon earnings will slide in the following year. Nevertheless, even with a 14% decline in earnings per share projected, the City community still believes the company will be able to payout $3.70 per share to investors via dividends next year. That gives a dividend yield of 7.5% on the current price.
These projections are highly attractive and adding to the appeal is Rio’s current valuation. At the time of writing, the stock is trading at a forward P/E of just 7.6. So, not only does this mining stock offer an attractive level of income, but it’s also dirt cheap as well.
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Rupert Hargreaves owns no share 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.