But are lithium stocks at a potential buying level, or is it too soon?

Why would I invest?

The International Energy Agency (IEA) predicts that the demand for lithium will increase by 400% by 2030, as more and more people switch to EVs. This is a huge growth opportunity for lithium companies, but it also means that there will be a lot of competition.

Investors also need to consider the supply of lithium. The world’s largest lithium reserves are located in Australia, Chile, and Argentina. However, these reserves are not evenly distributed. For example, Australia has a lot of lithium reserves, but it doesn’t have a lot of lithium production capacity. This means that Australian lithium companies may export their lithium to other countries, driving up the cost.

Most importantly, investors in lithium stocks need to understand that the market is still relatively new, bringing a lot of uncertainty. For example, it’s possible that demand for lithium could slow down if there is a breakthrough in battery technology that negates the need for large amounts of lithium.

Which companies are well positioned?

With all of that said, there are a few lithium stocks that I think are worth considering. Two of my favourites are Albemarle and SQM.

Albemarle is the world’s largest lithium producer. The company has a strong track record of growth and a diversified portfolio of lithium assets. Albemarle is also well-positioned to benefit from the growth of the EV market. The company has a joint venture with Tesla, and it is also supplying lithium to other major automakers, such as BMW and Ford.

SQM is another leading lithium producer. The company has a strong presence in Chile, which is home to some of the world’s largest lithium reserves. SQM is also a major producer of iodine, which is used in a variety of industries, including electronics and pharmaceuticals.

Both Albemarle and SQM are interesting for those who are looking to get exposure to the potential growth of lithium stocks. However, there are some key differences between the two companies. Albemarle is a more established company with a larger market capitalisation. SQM is a smaller company with a higher growth potential.

Discounted cash flow calculations suggest the shares in both companies may be as much as 75% undervalued. The price-to-earnings (P/E) ratio of 6.6 times for Albemarle, and 5.5 times for SQM, is significantly below the average of the sector at 14.2 times.

Profit margins for both are also growing, with Albemarle at 41%, and SQM at 35%. Despite the next few years showing low or declining growth in revenue for both, this growth in margin suggests that the sector is moving in the right direction.

Am I buying lithium stocks?

Lithium stocks are clearly going to play a significant role in the growth of the EV sector. However, there are some risks associated with investing in lithium stocks at this stage, and the coming years look uncertain.

For my portfolio, I believe that resilient companies able to grow steadily in the sector will be well positioned, and intend to invest in both companies in the coming months.

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There are several reasons for this. Stocks paying a dividend tend to be more established companies, and that suggests there’s less risk involved than investing in growth stocks. Of course, every investment contains an element of risk. Even if I’m investing in blue-chip stocks.

But dividend shares also allow me to benefit from a compound returns strategy. This is the process of earning interest on my interest by re-investing my dividends year after year.

So which dividend stocks am I buying? Let’s take a closer look.

Green energy

Greencoat UK Wind (LSE:UKW) is a closed-ended investment company based in the UK. It focuses its investments on UK wind farms.

The trust’s farms generate up to 1,289.8 megawatts of clean electricity, which is sold to suppliers to power people’s homes — 1.5m of them to be precise. 

The dividend yield current sits at 5%. That’s above the index average and it will rise around 13%, in line with inflation, this year. After 10 successive RPI increases, I’d say this is a fairly reliable dividend.

I’ve recently added this stock to my portfolio but I am aware of the risks of investing in a stock that focuses on one technology in one region. This leaves it vulnerable to regulatory and taxation changes, as well as weather issues such as a dearth of wind.

However, wind energy is a highly profitable business right now. And technological advancements will only make it more efficient. As such, I’m looking to buy more when I have the funds available.

Silver metal

I don’t often invest in US stocks, well not at the moment. That’s because the pound is weak and I’m anticipating it appreciating in the long run. However, Sociedad Química y Minera de Chile SA (NYSE:SQM) is an exception — I’ve recently bought this stock.

SQM is a lithium producer. But its core advantage lies in its ability to produce lithium, iodine, and specialty fertilisers for lower costs than its competitors. With lithium prices rising in 2022, the firm posted a net income of $1.4bn and total revenue of $3.7bn. Margins are large for a mining company.

Prices of the silvery metal — lithium — have fallen in recent months amid concerns of oversupply. However, lithium is integral for the green revolution and, for now at least, is demanded in huge quantities by electric vehicle makers.

The company has invested considerably in capacity expansions, despite the expiration of the lease on the Salar de Atacama in 2030. This mine generates all of SQM’s lithium profits. That could be a concern, although I’d expect to see the company prioritise an extension of the lease.

The stock has demonstrated some volatility in recent months as the market interprets varying commentaries. However, the broader movement in upwards and the 8.5% dividend yield in very attractive.

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So let’s take a look at three stocks I think investors should be buying in 2023 to generate passive income.

Vodafone

Vodafone (LSE:VOD) is among the highest-paying dividend stocks on the FTSE 100. The communications giant is currently offering a sizeable 7.6% dividend yield.

However, it’s important to remember that high yields can sometimes be a warning. In this case, Vodafone has a fairly low coverage ratio — a financial metric that measures the number of times a company can pay dividends to its shareholders.

In 2022, the dividend coverage was 1.22. With performance looking fairly flat, the ratio could remain similar for 2023, but I’d like to see it closer to two. However, even if the dividend were cut slightly, it would still offer a highly attractive, above-average yield.

I recently bought this stock after e& (formerly Etisalat) upped its holdings in the firm and communications giant Liberty Global purchased a 4.9% stake. If telecoms giants see the share price as a buy, it probably is.

Hargreaves Lansdown

Hargreaves Lansdown (LSE:HL) is among the best growth stocks on the FTSE 100, but it also offers an attractive 5% dividend yield.

The stock is down 21% over one year and 45% over two. Hargreaves soared during the pandemic, but it’s become clear that the investment platform will struggle to maintain that pace of growth in the post-Covid world.

However, in the long run, I see Hargreaves growing considerably, especially when we’ve moved through the cost-of-living crisis. More and more Britons are looking to manage their investments, and Hargreaves offers the best platform to do this, in my opinion.

In the short term, there’s another tailwind. That’s higher interest rates. Hargreaves has been earning more interest on customer deposits. This has mitigated falling trading numbers during the cost-of-living crisis.

I’m buying more of this stock for the passive income and long-term growth story.

Sociedad Química y Minera de Chile SA

I’ve also recently added Sociedad Química y Minera de Chile SA (NYSE:SQM) shares to my portfolio. In fact, it’s one of a few US-listed stocks I own at the moment, due to the weakness of the pound.

SQM is a low-cost lithium miner, offering an impressive 8.6% dividend yield. It has a reasonably low payout ratio (43.9%) and this appears to be supported by positive fundamentals.

The soaring price of lithium has been core to the surging share price in recent years. And despite frequently changing narratives, it does appear that lithium prices will remain strong for the long run.

Of course, there are concerns about Chilean politics, geopolitics and access to this increasingly precious metal, but the signs are positive. Lithium is central to the electrification agenda and EVs require substantially more lithium than traditional combustion engine vehicles.

The post 3 stocks investors should buy for passive income generation in 2023! appeared first on The Motley Fool UK.

The Atacama Desert in Chile is basically the Saudi Arabia of the electric vehicle (EV) sector, as the highest concentrations of lithium on record can be found there. The element is a crucial material in EV batteries.

The SQM share price has shot up 42% over the last 12 months, but remains 22% off its November high of $111.

Soaring demand and profits

Beyond lithium, SQM’s four other business segments are specialty plant nutrition, iodine, potassium, and industrial chemicals. The company is the world’s largest producer of iodine, which is widely used in pharmaceuticals and disinfectants.

This provides a degree of diversification in its earnings, but the jewel in the crown is lithium. That’s because the world’s soaring demand for EVs and battery storage systems caused the price of lithium to start rocketing in 2021. This produced a Cambrian explosion on the company’s income statement.

The price of lithium has come down this year, but remains significantly above the five-year average. It’s no surprise then that the company has been investing to increase its lithium production capacity. With much of that now complete, the company expects to increase its market share.

It recently acquired a refining plant in China and management is open to more acquisitions. It certainly has the wherewithal to do so with over $3bn in cash on the balance sheet.

Cheap valuation with risk

The stock currently has a forward price-to-earnings (P/E) ratio of 6.3. That, compared to a sector median of 14, suggests the shares may well be in bargain territory right now. The dividend yield currently stands at a whopping 9%, covered 1.8 times by earnings.

This high yield is the reward for taking on the risk that lithium prices may tumble further as more supply enters the market. Goldman Sachs is extremely bearish for 2024, forecasting an average lithium carbonate price of $11,000 a tonne. That would be over a 75% drop from today’s price.

Meanwhile, Macquarie Research is calling for an average price of $62,586 a tonne in 2023, and a steady price through 2026. The consensus forecast for 2023 is $29,063 per tonne.

This variance means nobody really knows for sure. But long term, sales of EVs should grow exponentially, driven by the global transition towards a greener economy. The International Energy Agency predicts lithium demand will have to grow 26-fold by 2050 to reach net-zero.

This should keep the company’s profits healthy and dividends flowing for years. If I hadn’t already bought SQM stock, I’d buy today at $86 a share.

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Defensive stocks can also be referred to as non-cyclical. They’re expected to provide steadier dividends and possess a more stable share price. This is often because these firms produce necessities, such as utilities, healthcare, or consumer staples.

But I don’t need to look just at defensive stocks. The International Monetary Fund (IMF) says the UK is the only G7 economy likely to experience a recession in 2023. China’s economy is resurgent and there are other parts of the global economy that could perform well throughout the year.

So what stocks am I looking at?

The Renewables Infrastructure Group

The Renewables Infrastructure Group (LSE:TRIG) is a large British trust dedicated to investments in assets generating electricity from renewable sources. 

Electricity demand is one of those areas of the market that remains broadly constant at all points of the economic cycle. As such, I expect revenues will remain robust over the next couple of years.

The trust invests in renewable assets across Europe, including the UK, Ireland, France, Germany, Spain and Sweden. This large geographical footprint provides a degree of protection against variable conditions in a single geography.

This wider geographical footprint may also help the trust when it comes to the Electricity Generator Levy —  a tax on the extraordinary returns of electricity generators. I think there’s still a little confusion as to how the industry will respond to the levy. Although it will have been factored in to most share prices in the sector.

Right now, it doesn’t look expensive either. It trades with a price-to-earnings ratio of six and offers a dividend yield of 5.2%. That’s why I’m looking to add this one to my portfolio.

Sociedad Química y Minera de Chile

Sociedad Química y Minera de Chile (NYSE:SQM) has surged in recent years as demand for the price of lithium has soared. And in the context of this article, the state of the UK economy and demand for lithium don’t have a much correlation — so that’s a positive.

But there are many more positives too. China’s reopening will likely sustain demand for the increasingly precious metal which is a vitally important component in the green agenda. For one, the nation is fast-becoming the global hub for electric vehicle production.

More generally, during periods of market volatility, I’m often on the lookout for stocks that benefit from long-term trends. The green agenda, or the electrification agenda, is perhaps the most obvious trend of our times.

China is full of surprises right now, and I’m aware that some of those could be negative as the year progresses. However, for now, the environment appears positive and conducive for lithium demand. That’s why I recently bought this stock.

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My portfolio performed fairly well over the past year considering the environment. But going forward, I want to achieve double-digit growth over the next 12 months.

For me, dividend stocks are core to this. If I pick wisely, I can be fairly sure that I will receive at least a dividend. If I’m very wise, I can hope to see some upward movement in the share prices too.

So, let’s take a close look at my top picks.

A safe yield

In 2021, Lloyds (LSE:LLOY) had a dividend coverage ratio of 3.8. This was substantial, and meant that the bank could afford to pay shareholders the stated dividends nearly four times.

Going into 2023, Lloyds will likely continue to benefit from higher interest rates. The bank said the net interest margin (NIM) — essentially the difference between lending and saving rates — was forecast to reach 2.9% by the end of 2022, and it could grow further in 2023.

Lloyds is even earning more interest on its deposits with the Bank of England. Analysts suggest that every 25 basis point hike is worth £200m in interest revenue. To date, this could represent a £2.5bn tailwind in central bank-derived income alone.

I’d also expect to see the share price to push upwards over the next year as the economic environment improves. But in the near term, one risk is that impairment charges could rise due to a possible recession.

I’ve owned Lloyds shares for some time, but have recently bought more. It currently offers a 4.4% yield, and that’s great.

But I also think we could see at least a 5% increase in the share price over the next year. One reason for this is that a discounted cash flow model with a 10-year exit suggests the stock is undervalued.

This is calculated by forecasting cash flow over 10 years, and subtracting a discount rate — reflective of the time value of money. The calculation suggests it’s undervalued by as much as 60%.

A surging resource stock

Sociedad Química y Minera de Chile (NYSE:SQM) has a sizeable 8% dividend yield and coverage is around 2.2 — anything above two is considered healthy.

The Chile-based speciality chemicals company focuses on the mining and production of iodine, lithium and other industrial chemicals.

The stock has soared over the past 18 months as lithium prices increased 10-fold. But there’s no reason to assume it won’t continue its bull run.

While the global economy might be slowing down, demand for battery dependent products, particularly electric vehicles (EVs), has remained strong. That’s because demand for lithium is tied to one of the most important economic trends of our generation.

I expect increased competition for resources over the next decade that will translate to higher prices for fuels and metals.

I don’t often buy stocks denominated in US dollars due to currency fluctuations. That’s because an appreciating pound could wipe out some of my gains, which is a clear risk.

But I’m bullish on this miner. I see lithium as a powerful investing theme and I wanted the well-covered 8% yield. That’s why I recently added it to my portfolio.

With an 8% yield and a bit of share price growth, I could achieve my double-digit objective.

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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.

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Today, I’m looking at lithium giant Sociedad Química y Minera de Chile (NYSE:SQM). The stock has been on one hell of a bull run. It’s up 43% over the past 12 months as the price of lithium has soared. The company is now selling more lithium at higher prices.

Company profile

SQM isn’t particularly well known in the UK. The Chile-based speciality chemicals company focuses on the mining and production of iodine, lithium and other industrial chemicals.

Lithium is a big story in recent years, and SQM is big in lithium. It is a low-cost producer and has a 25% share of the global lithium market with 20+ years of reserves. 

The company has indicated it plans to increase lithium carbonate equivalent capacity by 30% annually until 2025. This should help maintain its market leadership while responding to increasing demand for the silvery-white alkali metal.

Big dividends

With revenues surging throughout 2022, SQM upped its dividend. In fact, the 2022 dividend ($4.5) will be more than double that received in 2021 ($1.9). It offers an 8% yield.

So is that sustainable? Well, if the current level of profitability is maintained, then yes. SQM’s revenue for the quarter ended 30 September was $2.95bn — a 347.18% increase year on year. That’s greater than the entire revenue generation for 2021.

Lithium prices

Lithium prices are core to SQM’s current level of profitability. In the last quarter, the miner posted a net profit of $1.1bn, with lithium revenues growing more than 12 times. In a recent update, the company said that average lithium prices rose to record levels during the last quarter. The average achieved price was around $56,000 per tonne.

Many analysts saw lithium prices falling this autumn. Some suggested prices would fall from highs near $70,000 in the summer, to around $10,000 in 2023.

But that hasn’t been the case. Instead, prices appear to be settling around $60,000. And that’s because demand has remained more robust than originally anticipated. While the global economy might be slowing down, demand for battery dependent products, particularly electric vehicles (EVs), has remained strong.

And, to me, that makes sense. The growth of the EV market appears insulated from other global economic trends. China is central to this. Sales of EVs are expected to exceed 6.5m units in 2022 in China, double last year’s amount. And there’s no slowing down.

So am I buying SQM shares? Yes, I am. But I’m keeping a close eye on the share price amid protests in China.

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What does it do?

SQM is a Chile-based speciality chemicals company, focusing on the mining and production of iodine, lithium, and other industrial chemicals. However, it is best known as one of the world’s biggest lithium stocks.

Lithium is widely used in the production of batteries that are installed in electric vehicles and used in other technologies. With demand for rechargeable batteries soaring in recent years, so have lithium prices. The price of the silvery-white alkali metal has gone from around $10,000 per tonne less than a year ago to nearly $60,000 today.

A $60k reason to buy SQM

Lithium prices have soared, but few people expected them to remain at this level. In the summer, when prices were at $70,000 per tonne, Goldman Sachs forecast that lithium prices would fall to $16,000 per tonne in the second half of the year and further in 2023.

However, that forecast has not materialised. In fact, prices have stabilised around $60,000. Last week, SQM said it expects prices for the battery material to stay high into 2023 as some analysts feared an end to China’s two-year buying frenzy would cause prices to collapse.

Average lithium prices rose to record levels during the last quarter to more than $56,000 per tonne, the company said. The company forecasts global lithium demand to grow during the year by at least 40%, partially due to rising electric vehicles sales in China — sales of EVs are expected to exceed 6.5m units, double last year’s amount.

Surging share price

SQM shares are up 45% over the past 12 months, with lithium prices at core of this. The surge in the price of carbonate and its impact on SQM’s gross profit is impossible to ignore.

In the last quarter, the miner posted a net profit of $1.1bn. Quarterly revenue surged more than four times year-on-year to $2.95bn, with lithium revenues growing more than 12 times.

But can the share price growth be sustained? I think so.

Demand for lithium is proving a lot more robust than originally thought. And, in hindsight, it is logical. While the global economic slowdown might be bad for car sales, EV sales are still expected to grow. After all, the movement towards EV adoption is critical in reducing global carbon emissions.

Naturally, a deeper than expected global slowdown or more sustained Chinese lockdowns clearly won’t be positive for lithium demand. However, that’s not the scenario we’re looking at now.

As such, I’m finally looking to add SQM to my portfolio. And while many growth stocks don’t provide dividend payments, SQM offers an attractive 4.6% yield.

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So here are two stocks that I think could be huge winners over the next decade and beyond.

NIO

NIO (NYSE:NIO) is a Chinese electric vehicle (EV) manufacturer based in Shanghai and there are several things I like about this stock that have made me buy.

Firstly, despite not yet being profitable, the firm has been on an impressive growth curve. The firm doubled revenue in each of the years between 2018 and 2021. However, 2022 might be different as the company has been impacted by Covid-19 lockdowns and supply constraints. But it will be opening its second factory this autumn.

NIO also has an impressive range of models, and that’s positive for future growth. The vehicles have impressive ranges utilising larger batteries than industry-leader Tesla. The Shanghai-based firm also has unique battery-swapping technology, allowing drivers to pull up at a NIO service station and exchange their empty batteries for a full one in a matter of minutes. That’s far quicker than conventional charging.

The vehicles are also packed full of gadgets, including a voice-controlled gismo for window opening and selfie taking.

In a fairly novel move, NIO also offers customers the chance to buy everything from groceries to clothing from its online store. The brand clearly recognises that people buy groceries more frequently than cars.

I’m aware that further lockdowns and worsening geopolitical tensions wouldn’t be good for NIO. But that’s a risk I’m willing to take in the long run. I’d buy more today.

Sociedad Química y Minera de Chile

Sociedad Química y Minera de Chile (NYSE:SQM) is a mining company focusing on lithium — the metal used in batteries that power everything from phones to EVs.

The stock has being on a bull run this year as lithium prices surged from $10,000 per tonne to around $70,000 this summer. In fact, the stock is up around 90% over the past 12 months as profits soar.

However, many analysts have forecast that lithium prices will fall towards the end of this year amid a global economic slowdown and less demand for iPhones and new EVs.

And this is why I’m not buying SQM stock just yet as I think there will be better entry points later in the year.

But I think the long-term outlook is very positive. I also see that we’re entering a period of scarcity defined by intense competition for resources — particularly lithium — and higher commodity prices.

SQM is a low-cost producer of the metal that is central to the electrification revolution and has a 25% share of the global lithium market. It also has 20+ years of reserves. 

I am concerned about the impact of currency fluctuations and the weak pounds on my USD investments, but I do see plenty of growth with SQM.

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