Our Top Three Defensive Plays for Falling Commodities Prices
By Moe Zulfiqar for Daily Gains Letter |
While investors with balanced portfolios have enjoyed great returns provided by the key stock indices thus far, those who were heavily focused on commodities and the basic material sector most likely beg to differ. Commodities prices have come down across the board: precious metals like gold and silver have been trending downward, copper prices are edging lower, and agricultural products like corn and soybeans are outright facing selling pressures.
With these happenings comes a question: what should an investor do in situations like these, when the commodities prices are sliding lower?
One action investors might want to take before falling commodities prices take a further toll on their portfolio is to cut their losses and change their allocation, selling what has gone down significantly. Simple math would suggest this: if a stock has fallen 50% in value, it has to increase 100% for an investor to just break even.
If investors continue to be persistent with a belief that commodities prices have a great future ahead, but are witnessing a minor sell-off now, they may want to look at companies that are involved in making, exploring, or doing business with those commodities and have some sort of income attributes to them.
The idea behind this investment strategy is simple: until the commodities prices settle down, companies can provide investors with income in the form of dividends. For example, if a stock price goes down 10%, but over the year it provides a six-percent dividend, then, in essence, their loss is only four percent for the year.
The following are a few ways investors can be exposed to certain commodities and be able to reduce their losses by earning income:
Industrial Metals
To have some exposure in the portfolio to fluctuation in industrial metals prices, investors may want to consider companies like Nucor Corporation (NYSE/NUE). This company manufactures steel and steel products and sells them in North America and internationally. The company is priced at $46.40 and has a forward annual dividend yield of 3.1%, or pays $1.47 per share. (Source: “Nucor Corporation,” Yahoo! Finance, last accessed August 6, 2013.)
Precious Metals
Alamos Gold Inc. (NYSE/AGI) can be one of the many companies investors can use in their portfolio to have exposure to commodities like gold and silver. Even when the entire sector is suffering with deep losses, this company’s share price hasn’t declined much in value. The company is priced at $13.55 and has a forward annual dividend yield of 1.4%, or pays $0.20 per share. (Source: “Alamos Gold Inc.,” Yahoo! Finance, last accessed August 6, 2013.)
Agriculture
Cresud Sociedad An (NASDAQ/CRESY), based in Argentina, is a producer of agriculture products like corn, wheat, and soybeans. Companies like this can provide investors with a place to shelter themselves as the agriculture sector remains in stress. The company is priced at $7.90 and has a forward annual dividend yield of 5.8%, or pays $0.44 per share. (Source: “Cresud Sociedad An,” Yahoo! Finance, last accessed August 6, 2013.)
However, there are risks that investors need to continuously pay attention to. For example, what happens if a price of a certain commodity continues to be in a downfall? The stock price may go down more, and the dividend payout may not mean much. In addition, investors need to realize that a company with its business built around a certain commodity can eventually stop giving out dividends due to low cash positions.
Tags: commodities, copper, dividends, gold, investment strategy, key stock indices, portfolio, precious metals, silver
