Glencore PLC (LON:GLEN) (GLEN.L) is expected to have a dividend yield of over 5% in the current year. That’s over 100 basis points higher than the FTSE 100’s dividend yield, and suggests that the stock could offer an impressive income return.
Clearly, the company’s dividend yield has been given a boost by its recent share price fall. The resources industry has come under a degree of pressure due in part to the strength of the dollar. This makes a range of commodities less attractive to international buyers, since they are generally priced in dollars. With the US expected to continue to raise interest rates, the dollar could strengthen further over the coming months.
In spite of this, I think that the long-term prospects for Glencore could improve. It may benefit from the strength of the world economy, with GDP growth in countries such as China and the US continuing to rise. This may help to keep demand for commodities relatively buoyant, and could lead to improved financial performance across the sector.
With the company having made improvements to its business model in recent years, it now offers greater stability than it once did in my view. It has cut costs, reduced debt and may now be better placed to overcome the risks associated with operating in the resources industry.
That said, the company continues to have a relatively uncertain outlook. Its dividend may be covered 2.3x by earnings at the moment, but a fall in commodity prices could hurt its financial outlook and put dividends under pressure.
Therefore, I think that while Glencore does have some income investing appeal due to its high yield, it lacks the resilience or stability of some of its FTSE 100 peers. It may offer impressive total returns, but other FTSE 100 stocks may be able to deliver a stronger risk to reward ratio from an income investing perspective.