Companies in the mining sector are approaching “questionable” dividend yields, says Olivia Markham, manager of the £94.2m BlackRock Commodities Income Investment Trust.
The commodities sector has had a challenging 12 months, suffering from a difficult macroeconomic environment and a plummeting oil price.
Company share prices have suffered as a result and, with groups continuing to increase dividend payouts, this has led to some unusually high yields.
While some investors had seen the high payouts as a reason to buy into mining firms, Ms Markham warned the dividend yields of some companies were approaching “extreme” and “questionable” levels.
In normal markets, these businesses had a 2 to 3 per cent dividend yield, she said. However, Anglo-Australian multinational mining group BHP Billiton currently has a dividend yield of more than 5 per cent.
The stock is the manager’s largest holding, making up 5.8 per cent of her total assets.
But if the yield climbs much further, then the market would begin to question its sustainability, she said.
Between November 2014 and January this year, Ms Markham said she had been selling out of companies that she thought were in danger of not being able to pay their dividend.
For example, she sold out of Canada Oil Sands, which then cancelled its dividend in January.
In spite of these sales, the manager has recently been increasing her exposure to the mining sector in her BlackRock Commodities Income trust, which tends to focus mainly on the mining and energy sectors.
“Mining was hit worse than energy in the downturn,” Ms Markham said.
“Mining has suffered four year-on-year declines, [which] is the longest I’ve ever seen for the sector.”
However, in future she thought both areas had an even chance of being the best performing area in her investable universe.
Given this outlook she has shifted the trust’s portfolio so that it is now split 50 per cent each in energy and mining, whereas 12 months ago it was 65 per cent exposed to energy.
Moving into the second half of this year, Ms Markham said she was optimistic the performance of the commodities sector would start to improve.
“We are getting all the right signals that we are at the lowest point,” she said.
“Companies are focusing on dividends, and supply and demand dynamics are beginning to rebalance.”
However, the manager was keeping her optimism tempered. “It’s hard to tell when the cycle is going to turn again – there is still a lot to contend with,” she added.