3 Dividend Stocks to Ride the Commodity Rally

The rally in commodities has taken the world of investing by storm in the past few months. A broad basket of commodities, including staples like crude oil and gold, but also wheat, nickel, natural gas and others have soared as geopolitical risk and supply chain-driven inflation take hold. This has negative impacts on a variety of industries that rely upon these rising commodities as inputs, but for the suppliers of these commodities, it is a potentially significant windfall. Here, we'll take a look at three dividend stocks we like in the current environment to take advantage of rising commodity prices, two of which are Dividend Aristocrats despite the inherently cyclical nature of commodities. Archer-Daniels-Midland Our first stock is Archer-Daniels-Midland Co. , a commodities giant that engages in the full lifecycle of commodity procurement, transportation, storage, processing, and distributing of a wide variety of commodities and finished products. Its three main segments are Ag Services and Oilseeds, Carbohydrate Solutions, and Nutrition. ADM has vast exposure to commodities such as oilseeds, corn, wheat, barley, oats, vegetable oils, ingredients for food and animal feed, sweeteners, and much more. ADM was founded in 1902, generates almost $90 billion in annual revenue, and trades with a market capitalization of $46 billion. ADM is certainly highly exposed to rising commodity prices when it comes to food and the raw materials that are used to make food. The food commodity that has received much of the press during this inflationary period is wheat, which has spiked sharply in recent weeks. That's helping ADM produce outsized growth for the time period that this spike persists, over and above what we already expected. Our base case for earnings-per-share growth is 6% annually, and we see potential upside to that if food cost inflation continues. ADM is one of the Dividend Aristocrats in this list, as it has boosted its payout for an extremely impressive 47 consecutive years, putting it in rare company among dividend stocks. The company has raised its payout an average of nearly 9% annually during the past decade as well, so the increases to shareholders are significant, to say the least. Even so, the payout ratio for this year is estimated at just 31% of earnings, so we see the dividend as not only very safe, but with lots of room for future increases as well. The yield is just over 1.9% following the recent rally in the stock, but that's still about 1.5x that of the S&P 500. This combination of a nearly five-decade streak of dividend increases, a low payout ratio, and a market-beating yield makes ADM quite attractive during this commodity price surge. Barrick Gold Our next stock is Barrick Gold , a company that engages in the exploration, mine development, production, and sale of gold and copper globally. Barrick has ownership interests in gold mines in Africa, South America, North America, and the Caribbean. Barrick was founded in 1983, produces about $12 billion in annual revenue, and trades with a $42 billion market capitalization. Barrick is one of the largest metals miners in the world following its acquisition of Randgold. Barrick is highly leveraged to the price of gold, but it also sells a huge amount of copper. Both metals have risen sharply in recent weeks, and remain at elevated levels. So long as that persists, Barrick's margins should soar along with its revenue, which is why we like it in this inflationary environment. Our base case for Barrick is 3% EPS growth, with upside for this year in particular if we see continued metals pricing inflation. Barrick doesn't possess a long history of dividend increases because it elects to pay variable dividends based upon earnings. While that results in windfalls during periods of metals pricing inflation, it means that dividend cuts do occur periodically. At the moment, Barrick is sporting a six-year increase streak, averaging 31% annual increases during that period. That pace is obviously unsustainable, and we see modest growth ahead for the dividend as the company continues to try and deleverage with bumper earnings. Barrick's payout ratio is just 36% for this year, so we don't see cause for another cut anytime soon. The stock is yielding about 1.7% following the gold price-driven rally in the stock, which is still ahead of the broader market. Chevron Our final stock, and our second Dividend Aristocrat in this article, is Chevron Corp. . Chevron is a fully integrated energy conglomerate that operates two segments: Upstream and Downstream. The Upstream segment is involved in the exploration, development, production, and transportation of crude oil and natural gas. The Downstream segment refines crude oil and other products into renewable fuels, lubricants, chemicals and more. Chevron traces its roots to 1879, is on pace to produce more than $200 billion in revenue this year, and has a $324 billion market capitalization. Chevron is exposed, of course, to energy markets. The company benefits from higher crude oil prices, which also drives higher finished product prices that use crude oil as a base. Chevron, therefore, is well-positioned for $100+ crude oil, and the share price has spiked as a result. Our base case is for roughly flat earnings over time, but the spike in crude oil has the potential to see Chevron produce excess earnings this year so long as the spike in prices persists. Chevron has a 35-year streak of dividend increases despite the inherent cyclicality of energy markets. The average increase in the past decade is right at 5%, so Chevron has done a nice job of rewarding shareholders with meaningful increases over time. The payout ratio for this year is 57%, so that's quite reasonable and provides Chevron with the ability to raise the payout in the years to come, whatever happens to the price of crude oil. The stock is also yielding 3.6% today, which is almost triple that of the S&P 500. On those measures, Chevron is a very strong income stock. Final Thoughts The commodities rally we've seen in recent weeks has caused a lot of angst among certain sectors that rely upon these commodities as inputs. However, for the companies supplying these inputs, current market conditions are perfect. The three stocks we've highlighted here -- ADM, Barrick, and Chevron -- all stand to gain from the current environment, and we see all three as attractive dividend stocks because of it.

3 Dividend Stocks to Ride the Commodity Rally

Two of these names are Dividend Aristocrats, despite the inherently cyclical nature of commodities.

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