10 of the best mining shares for dividend investors

With dividend yields in excess of the market average and valuations on the cheap side, stock screen expert Ben Hobson explains the appeal of the mining sector.

Digging around for shares in the metals & mining sector presents some unusual challenges for equity investors.

On one hand, mining offers attractive diversification benefits. Exposure to global trends in industries and economies can provide much-needed balance if your portfolio is weighed down by stocks sensitive to what’s going on at home.

• Invest with ii: Top UK Shares | How to Start Trading Stocks | Open a Trading Account

But it’s also a cyclical sector, and even industry analysts find it hard to accurately predict changes in supply and demand for a huge range of metals and other commodities.

Here in the UK, mining is represented by a wide spectrum of companies, ranging from speculative micro-caps to a handful of global blue-chips.

For some investors, the appeal lies in picking the lottery-like winners from explorers at the smaller end of the market. If you can pick the right company and the right metal at the right time, you might get lucky.

But for others, the attraction lies in the benefits of diversity and scale you only get with larger, more established miners. In many cases, these companies also come with eye-catching dividends. After a mixed performance last year, what are UK-quoted mining companies offering investors in 2023?

Making sense of mining

Take a look at a 10-year chart of the FTSE 350 Metals & Mining Index and you start to get a sense of the cyclical nature of the sector.

Source: SharePad: FTSE 350 Metals & Mining Index - 10 Year

In 2015, the industry experienced a cyclical low. After years of expansion, companies were hit with a massive downturn in demand that led to severe write-downs and rationalisation. Commodity prices slumped and investors fled. But this was precisely the time to buy. When the market turned in early 2016, mining shares soared.

More recently, mining recovered quickly from the Covid crash in 2020 and flourished in comparison with many other sectors. Here, again, the cyclical nature of global markets helped to push profits and share prices to new highs.

• 10 shares to give you a £10,000 annual income in 2023
• 24 UK dividend stocks for income seekers in 2023

Last year, the outbreak of war in Ukraine, uncertainty about a ‘reopening’ in China and general investor unease, saw sector prices come under pressure once again. But with many parts of the world wrestling with energy transition and the emerging green economy, it seems certain that miners will play a leading role in developing sources of essential new metals and minerals.

Dig deeper into share price performances and it’s clear that a number of players in the sector have decent price momentum behind them.

Drilling into mining sector dividends

One of the trade-offs for the cyclical swings that mining shares tend to experience is that together they pay the best dividends anywhere in the market.

Last year, industry giant Rio Tinto (LSE:RIO) was the biggest paying company in the UK market, with Glencore (LSE:GLEN) and Anglo American (LSE:AAL) also ranking in the top 15.

As a sector, mining shares paid out over £16 billion in 2022, according to dividend data-gatherer Link Group. That was up by 5.2% on a headline basis against 2021. Of that total, £2.3 billion were ‘special dividends’, which are usually paid when companies are enjoying booming profits.

To put that in context, the next biggest paying sectors were banking and oil & gas, which paid out £10.6 billion and £9.8 billion respectively last year.

In Link’s words, mining dividends accounted for £1 in every £6 paid by UK-quoted shares. But as a note of caution, payouts did fall in the second half of the year, which is likely to continue in 2023. Despite that, the sector is unlikely to lose its place at the market’s best dividend payer in the foreseeable future.

How FTSE All-Share miners shape up for 2023

The UK’s smallest and most speculative mining shares are quoted on the Alternative Investment Market. That leaves only around 15 stocks in the sector listed on the Main Market indices. So this week, I’m applying some simple measures to try and understand the strengths and weaknesses in some of those FTSE All-Share miners.

In particular, this screen looks at:

• expected dividend yield in the year ahead
• forecast price-to-earnings ratio as a measure of valuation
• expected earnings growth over the next one and two years
• performances of the shares relative to the market over the past six months

Data: Stockopedia

In line with expectations about the outlook for miners in 2023, earnings growth is set to moderate over the next couple of years for some of these firms. There’s quite a lot of variability in the forecasts, and even those where earnings per share (EPS) is set to grow can disappoint.

Gold and silver producer Hochschild Mining (LSE:HOC) said this week that it had undershot production guidance for 2022, which put pressure on the shares. This shows how unpredictable some smaller mining stocks can be - but even larger shares are not immune. Fresnillo (LSE:FRES), one of the world’s largest silver and gold producers, recently said that soaring costs were affecting its profits.

• Watch our video: My FTSE 100 mining stock tip for 2023
• Watch our video: Will gold hunters get rich in 2023?

It’s worth noting that for most, share prices have outperformed the FTSE All-Share index over the past six months. Multi-commodity trader Glencore (LSE:GLEN) has seen its shares perform exceptionally over the past year. And on a dividend basis, it also comes with the highest forecast yield here, at 8.4%. That compares with a still-impressive 6.0% for other big industry players like Rio Tinto (LSE:RIO) and Ferrexpo (LSE:FXPO).

In terms of price/earnings (PE) valuations, Antofagasta (LSE:ANTO) is the priciest share in the list, with a PE of 29.7x. The company is a major copper producer, which is one metal widely expected to benefit from surging demand for electrification - so that valuation is no surprise.

It’s worth mentioning the smallest company here is Capital Ltd (LSE:CAPD), which is actually a ‘picks-and-shovels’ service business to the mining sector. It has had a strong run of earnings growth in recent years, but analysts are less certain about the future.

Overall, many of the FTSE All-Share’s small band of big-hitting mining companies are entering 2023 on the back of a strong final quarter last year. With dividend yields generally in excess of the market average and most PEs below 10x, it’s hard to deny the appeal of a sector that has been on such a strong run in recent years.

Despite the earnings outlook looking less certain, the market is still positive on the sector. And for investors looking for diversification options after a difficult year in 2022, mining could be worth a closer look.

Ben Hobson is a freelance contributor and not a direct employee of interactive investor.