Home Commodities Worried About Inflation? Consider These 3 Commodity-Driven Dividend Stocks

Worried About Inflation? Consider These 3 Commodity-Driven Dividend Stocks


Earnings season is still in its early stages. Yet already, we’ve seen the very real impacts of inflation course through the income statements and tear a chunk out of the profit margins of large and small companies alike.

Investors looking for safe stocks could consider companies with exposure to some of the very commodities that are driving inflation in the first place. Caterpillar (CAT -4.32%), Freeport-McMoRan (FCX -1.12%), and Yamana Gold (AUY -0.95%) are three dividend stocks that may be worth a look now.

Copper coils in an industrial factory.

Image source: Getty Images.

Caterpillar paints a grim outlook of the global economy 

Daniel Foelber (Caterpillar): Share prices of Caterpillar are under pressure after the company reported disappointing first-quarter results. Caterpillar’s oil and gas, power generation, and transportation applications, which together make up about 60% of its energy and transportation segment, grew revenue by less than 10% in Q1 2022 compared to Q1 2021, which is disappointing given the strength of the oil and gas industry. However, its resources segment, which includes mining, saw year-over-year sales surge 30% thanks to a staggering 55% increase in North America revenue and a 33% increase in Asia/Pacific revenue. Resources segment profit margin fell by 1.5 percentage points but overall segment profit was up by 16%. 

Caterpillar is confident that demand paired with price increases will offset the cost of inflation and ongoing supply chain challenges. So far, Caterpillar has technically been correct as it was able to grow sales by 14% and profit per share by 3%. But when investors see a company grow revenue at a much higher rate than profit and see profit margins fall in every single business segment, that’s usually a sign that costs are rising. Margin pressure is an ongoing theme in the industrial sector. And Caterpillar just provided a leading indicator that it could get worse from here.

Caterpillar’s backlog grew by $3.4 billion in Q1 2022 compared to the fourth quarter of 2021 and by $9.7 billion in the last year alone, which is a sign that demand is outpacing its ability to produce and deliver products. In this vein, it would appear that Caterpillar is an inflation-resistant stock to consider now. Inflation may dampen the company’s ability to grow as fast as some hoped for. But in an environment where many companies are reporting much slower growth and uncertain demand outlooks, Caterpillar looks relatively better positioned. On top of that, Caterpillar is a Dividend Aristocrat that has paid and raised its dividend for 27 consecutive years — which provides a passive income stream for patient investors.

Underlying solid demand trends support a positive outlook for copper

Lee Samaha (Freeport-McMoRan): Copper miner Freeport-McMoRan has lost almost 20% of its market cap since its disappointing earnings release on April 21. Still, it’s hard not to think the sell-off is an overly dramatic response. The problem wasn’t so much in the first-quarter earnings. Instead, the market took a dim view of management lowering its sales volume estimates for 2022 and 2023 and increasing its estimate for unit net cash cost of copper.

Still, some perspective is needed. A market cap reduction of nearly 20%, or $13.7 billion, doesn’t make a lot of sense for a company reducing its sales volume estimate by 100 million pounds of copper from 8.8 billion pounds of copper over 2022 and 2023. Moreover, the reduction in sales volume expectations (mainly due to an increase in COVID-19 cases in early 2022) and increase in unit net cash cost estimates comes down to issues like the rising cost of energy and other raw materials, which may prove transitory.

Thinking longer-term, the demand for copper is supported by its use in electric vehicles (wiring, batteries, and charging networks), renewable energy (storage and transmission), and the general electrification trend in the economy. These are all trends that aren’t going away any time soon.

If economic growth holds up, then demand for copper will, too, and Freeport-McMoRan will profit from it.

Walk this yellow brick road to ease your inflation worries 

Scott Levine (Yamana Gold): The gas pump and the grocery store may be the most glaring examples, but rising prices are affecting consumers in a variety of ways, and it doesn’t seem that inflation will be easing anytime soon. There’s no silver bullet for protecting oneself against the impact of inflation; however, adding exposure to commodities — specifically, gold — is one common strategy investors turn to when concerned about the effect of inflation.

For many people, the thought of investing in gold brings images of stopping by the local coin gallery to bulk up on gold coins. This approach only results in recognizing a gain on the investment if the price of gold rises. A more lucrative approach, however, is to pick up shares of a gold mining company — in particular, Yamana Gold. Like investors who buy bullion, Yamana Gold prospers when the price of gold rises, but the company locks in even greater gains when it’s able to keep its expenses for producing gold low. In 2021, for example, Yamana Gold reported that it produced 1 million gold equivalent ounces. Additionally, it realized an average price of gold of $1,800 per ounce, while it reported all-in sustaining costs of $1,030 per ounce. 

The company is a leading gold producer that has provided investors with returns that have outperformed the market price of gold over the past five years.

Gold Price in US Dollars Chart

Gold Price in US Dollars data by YCharts.

Should the price of gold climb — a common occurrence during times of inflation — Yamana stands to benefit, but even if the price of the yellow stuff fails to rise, Yamana can still provide gains for investors. And not only through the rise in its share price; Yamana also rewards shareholders with a dividend that currently sports a 2.2% forward yield.

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