Why Commodity Investors Should Focus on Dividend-Paying Equities

Over the last year, many bullish commodity traders and investors have chosen to take positions in equities of commodity producers rather than seeking commodity exposure through the traditional route of futures and options. This strategy, which allowed them to reap the double benefits of rising commodity prices and robust equity markets, was particularly successful in the second half of this year: Commodity prices did not have any solid gains until July, whereas world equity markets have performed spectacularly over the entire period.

But now with concern about equity markets that are breaking all-time highs, and a prevailing belief that a major correction is in store, investors are faced with a dilemma of what to do with those long equity holdings. Rather than sell or pare positions, market participants should consider focusing on dividend-paying commodity equities. There’s a value proposition in dividend investing because such stocks historically have had higher returns than the market average, according to many studies. In addition, cash-flow growth, which enables payment of dividends, positively correlates with excess returns.