Dividend stocks can be an excellent source of passive income, but which are the best ones to buy now? After all, not all income investments work out. The gains can be quickly eliminated if the share price falls. And if dividends get cut by management, then investors can be left owning a business that doesn’t generate much income.
With that in mind, let’s explore two dividend stocks with exceptionally high yields that I think have plenty of long-term potential.
Profiting from inflation
For most consumers and companies alike, inflation sucks. The increased cost of living typically results in lower consumer spending that can impact individual businesses as well as wider economic growth. However, there are a select number of sectors that can drastically profit from the situation.
The industry that’s currently at the top of my list is mining. Extracting metals from the ground is primarily a fixed-cost process. So, when inflation pushes up commodity prices, the profit margins of these businesses can expand drastically.
Both Rio Tinto (LSE:RIO) and BHP Group (LSE:BHP) have already begun reaping the benefits. While inflation has only recently started entering the picture, both of these businesses have enjoyed tailwinds thanks to the surging demand for battery and renewable energy metals over the last two years.
Looking at the interim results for both firms ending in June 2021, net income exploded by 271% and 140%, respectively. So, it’s not surprising that the dividend payout followed suit, and now both stocks offer a yield of around 8.6%!
With inflation pushing prices even higher, these dividends may continue to expand for the foreseeable future. Does that make these stocks the best dividend investment today? Possibly, but it’s not without its risks.
Even the best dividend stocks have risks
As impressive as the passive income-generating capabilities of these dividend stocks might be, they’re ultimately driven by metal prices. And since these are set by the market rather than the business, there is virtually no recourse available for management to counter falling metal prices.
At the moment, commodities are on the rise. But the higher prices haven’t gone unnoticed. As other mining businesses enter the arena to capitalise on the opportunity, global supply may eventually outweigh demand. In that scenario, prices will naturally start to decline, potentially jeopardising the dividend yield as well as sending these stocks in the wrong direction.
The bottom line
Personally, I feel the potential reward is worth the risk. The world is shifting towards electric vehicles and renewable energy technologies. Therefore the need for precious metals like copper, lithium and nickel mined by these businesses isn’t likely to disappear any time soon. At least, that’s what I think.
Combining this with their established mining portfolios and decades of expertise makes me believe these could be the best dividend stocks to add to my portfolio today.
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Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
This post was originally published on Motley Fool
