Doug Goodwille from Kayne Anderson speaks to Drew Meredith from The Inside Network on market thinkers.
While a surging gold price is on hold as the world adjusts to a Trump presidency, all the factors that saw its price rise more than 50 per during his first term in office – trade disputes, fiscal deficits and geopolitical tensions – are almost certainly guaranteed the second time around.
Why BHP is better than CBA for dividends
If I had to pick BHP Group Ltd (ASX: BHP) or Commonwealth Bank of Australia (ASX: CBA) for dividends, I would go for the resources giant.
That’s a combination of thoughts on both CBA and BHP.
I think BHP could be a pretty good blue-chip dividend pick. But I’m also not convinced that CBA is going to be a good pick.
Just because an income idea pays a dividend doesn’t automatically make it a strong dividend idea.
Why I’m not convinced about CBA
I rate CBA as the best bank on the ASX (aside from Macquarie Group Ltd (ASX: MQG).
In other words, I think it’s a better bank than National Australia Bank Ltd (ASX: NAB), Australia and New Zealand Banking Group Ltd (ASX: ANZ) and Westpac Banking Corp (ASX: WBC), as well as all the other smaller banks.
However, I don’t think that the banking sector has a strong future.
Banks like CBA are paying-out a lot of the profit they make each year. That means they aren’t keeping a lot for reinvestment into new opportunities.
CBA may be the busiest of the big four when it comes to other initiatives, such as buy now, pay later. However, it’s so large that I don’t think these initiatives will move the dial much.
There are also huge competitors that are looking to grow their position in the banking space, and perhaps loans as well. I’m thinking of names like Apple, Square, Afterpay Ltd (ASX: APT) and Zip Co Ltd (ASX: Z1P) that are muscling in on the space.
I’m also cautious about the prospect of exiting these COVID-19 conditions. Interest rates seem very likely to rise at some point and I think actual bad debts are likely to increase, too.
Finally, CBA may be one of the most expensive banks in the world. Using the CommSec estimate for FY22, CBA has an expected fully franked dividend yield of 3.7%.
Why I prefer BHP
I’m not normally a big fan of resource businesses, and I wouldn’t call BHP my best idea, but the company is growing on me.
BHP has a diversified portfolio of different commodities including oil, energy-related coal, steelmaking coal, iron ore, copper, nickel and now potash.
I think iron ore is a pretty cyclical resource, so it makes sense to consider iron ore miners when the iron ore price sinks, which it has. The iron ore price has approximately halved since May. The BHP share price has fallen around 30% since 4 August 2021.
Not only does it make sense to consider a cyclical business at the low(er) point of the cycle, but it is also doing well with its other commodities. The prices of oil and coal are very high, so BHP is benefiting. Nickel and copper prices are strong thanks to the trend towards green and renewable.
I’m also excited about BHP’s ultra long-term exposure to potash, the fertiliser, with its Jansen project in Canada. Potash is expected to offer consistent demand, growing prices and a strong profit margin for BHP.
In terms of the current dividend yield, BHP has an expected fully franked dividend yield of 11% in FY22 and 7.9% in FY23.
I think BHP offers a better yield, more long-term profit potential (at the current lower iron ore price) and more diversification options.
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