5 Agricultural Dividend Stocks for the Long Haul

Strong population and income growth in the developing world have buoyed the demand for commodities, especially for food. At the same time, unstable weather has resulted in shortages of certain agricultural commodities, such as grains, driving prices higher. The robust demand facing limited supplies is likely to result in a new commodities supercycle, in which prices will climb substantially in the coming years. Some, like famous hedge fund manager Jeremy Grantham, believe the new cycle is part of a general commodities paradigm shift, which Grantham called “the most important economic event since the Industrial Revolution.” All this has boosted the appeal of agricultural commodities as an investment class.

Dividend investors seeking exposure to agricultural commodities should consider different industry players across the value chain. These plays include farm and fertilizer stocks as well as commodities distributors and equipment manufacturers. Here is a list of five stock candidates with yields at or above 2% for an agricultural commodities-oriented portfolio.

Potash Corp./Saskatchewan (NYSE:POT) produces fertilizer potash. Robust population growth will require a 70% increase in food production by 2050, which, in turn, will necessitate an intensive use of fertilizers to increase crop yields. This trend bodes well for the world’s second-largest potash producer. Operating in an industry that functions like a cartel, Potash Corp./Saskatchewan (NYSE:POT) has already experienced strong EPS growth averaging 40% annually over the past five years. While analysts see a modest EPS growth ahead, the company’s long-term prospects are optimistic. Potash CEO sees potash shipments rising about 12.0% in 2013 from the year earlier on strong demand in India and China. The company’s remarkable EPS growth so far has been matched by robust dividend growth, which averaged 33% annually over the past five years. Potash Corp./Saskatchewan (NYSE:POT) currently pays a dividend yield of 2% on a low payout ratio of 20%. With trailing and forward P/Es at 13.4x and 13.8x, respectively, the stock is trading at a discount to its historical metrics, mainly due to decelerating EPS growth. Potash Corp./Saskatchewan (NYSE:POT) is popular with Phill Gross (Adage Capital) and billionaire Richard Chilton.

Deere & Company (NYSE:DE) is a farm (and construction) equipment maker with a dividend yield of 2.1% and a payout ratio of 24%. Intensive farming in the developing world will increase the demand for Deere’s farm equipment. A drought-induced commodities price boom has improved the demand for the company’s equipment in emerging markets, such as Brazil. The company is currently heavily investing in Brazil and China, which is weighing on its cash flow but over the long haul will be accretive to its earnings. The company’s long-term EPS CAGR is forecasted at 9.4% annually. Deere is a good dividend grower, with dividend growth averaging 14.5% annually over the past five years. The stock is priced attractively at 11.5x trailing and 10.5x forward earnings, below historical averages. Still, investors should take into consideration Deere’s negative free cash flow and an excessive long-term debt level at 328% of equity. Investing legend Warren Buffett bought nearly 4 million DE shares last quarter.