Although the rate of inflation fell from 2.9% to 2.6% last month, it still poses a problem for many investors. The income returns on a range of assets such as cash, bonds and even property (on a net basis) may offer a negative real yield at the present time. That’s why shares which either have a high yield or a fast-growing dividend could be worth buying right now. Here are two such companies which, while relatively risky, could be strong income stocks in the long run.
Releasing a quarterly report on Thursday was mining company South32 (LSE: S32). It delivered record performance at Mozal Aluminium, which aided a 2% rise in total aluminium production during the year. The company’s smelters continue to operate at their maximum technical capability, which boosted production to some degree.
While impressive, the remainder of the company’s portfolio did not achieve the level of consistency which had been expected. For example, Cannington recorded a significant decrease in ore grades and metal production, while there was a 15% decrease in Illawarra Metallurgical Coal production. Despite these disappointments, South32’s alumina, nickel and manganese operations ended the financial year on a positive note.
At the present time, it has a dividend yield of 4.1%. That’s from a shareholder payout which is covered 2.5 times by profit, which suggests that dividends could increase at a faster pace than profit without hurting the company’s reinvestment prospects. Certainly, the mining industry is not the most stable sector for income investors. But with an inflation-beating yield and the potential for rapid dividend growth, South32 could be a strong investment for the long term.
Also offering upbeat income prospects within the mining sector is Antofagasta (LSE: ANTO). The copper mining specialist is set to deliver strong earnings growth over the next couple of years as it benefits from the results of a strategy change which saw some restructuring in recent years. In fact, in the current year the company is expected to report a rise in its bottom line of 44%, followed by further growth of 10% this year.
Such strong growth in earnings is set to lead to rapid dividend growth. That’s especially the case with Antofagasta currently having a payout ratio of just 37%. This is forecast to enable it to raise dividends per share by 9% next year, with further scope for dividend growth in future years. While this puts the stock on a forward yield of just 1.8%, it would be unsurprising for dividend growth to beat inflation and lead to a relatively enticing income return over a sustained period.
As well as its income potential, Antofagasta also appears to offer good value for money. For example, it has a price-to-earnings growth (PEG) ratio of just 1.8, which suggests that provided commodity prices remain stable, it could deliver a high rate of capital growth in the long run.
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Peter Stephens owns shares of South32.