3 Natural Resource Stocks Yielding Up to 11%

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

By Lisa Springer

NEW YORK ( StreetAuthority) -- Many of us grew up in a world where natural resources like water and oil were cheap and plentiful, but those days are long gone. In today's world, some natural resources (such as clean drinking water) are already stretched to the limit and becoming increasingly scarce. In fact, potable water is already a top concern of world leaders and is beginning to rival oil as an investment theme.

Oil prices are making headlines, having resumed their relentless rise after dipping briefly during the recession. Demand is fueled by the insatiable appetites of countries like China and India, where more oil is needed to fuel economic expansion. The world won't run out of oil anytime soon, but most experts believe peak oil is already behind us and that developing new crude oil sources will be an increasingly expensive (and dangerous) endeavor.

Supplies may be running dry, but profit opportunities are plentiful in the natural resources sector. Here are three high-yielding stocks that should increase in value as the resources they provide become even more scarce.

1. Veolia Environnment ( VE)
Yield: 11%

French utility giant Veolia Environnement owns the world's largest water business in terms of revenue. The company's water segment designs and builds infrastructure necessary to provide clean water and operates drinking water plants, wastewater treatment and recycling facilities, drinking water distribution systems and wastewater collection networks.

The last five years have been challenging because Veolia expanded too aggressively and was drowning in debt during the recession. Earnings fell roughly 12% a year and Veolia was forced to slash its dividend nearly in half.

More recently, however, the company has begun a massive restructuring to streamline operations, cut debt and focus resources in growth areas like water, where the company enjoys a leading market share and competitive advantages. In particular, Veolia plans to expand its water business in China, where rapid economic growth requires more water for agricultural and industrial applications.

Veolia plans to sell about $6.5 billion worth of assets and reduce long-term debt to a still-high but much more manageable $16 billion, or 65% of capitalization.

Veolia's income fell 10% in 2011, to $2.37 billion from $2.5 billion a year earlier, but analysts think improvements to the balance sheet and investments in growth areas could drive 80% growth in income next year and 16% growth in each of the next five years.

Veolia shares are modestly valued at just 75% of book value, and the company appears committed to protecting its $1.47 annual dividend. The company has enough cash flow to cover the dividend more than five times over, and shares yield 10.7%.

2. Permian Basin Royalty Trust ( PBT)
Yield: 7%

Permian Basin Trust was created by Burlington Resources, which was subsequently purchased by ConocoPhillips ( COP) in 2006. This royalty trust offers great exposure to rising oil prices and low risk due to its focus on mature properties mainly from 34,205 acres in the Permian Basin of Texas, with oil contributing 63% of trust income and the remainder from natural gas.

Reserves are estimated at 6.2 million barrels of oil and 21.2 billion cubic feet of natural gas, and the trust has a 10-year remaining life. Distributions fell earlier this year, but not because of production or price declines. The reason was a charge against the trust's royalties taken by ConocoPhillips for overpayment in prior periods. Since monthly trust production is estimated, payout adjustments are sometimes made when actual production data become available.

Permian Basin units currently yield 6.7%. Monthly distributions generally track oil prices, and analysts expect rising oil prices to produce 10% yearly income gains for the trust.

3. Southern Copper ( SCCO)
Yield: 7%

Southern Copper is a leading copper producer and has the world's largest copper reserves. The value of these shares change with copper prices.

Demand for copper, which is used in electronics and industrial processes, should grow at a healthy clip as world consumption rebounds. Copper prices have fallen in 2012 but are still 50% higher than five years ago, and a lack of new world-class discoveries should push prices steadily higher.

The company returned its Buenavista Mine to full capacity last year, which resulted in 23% higher production in 2011. Southern Copper targets a 9% increase to 640,000 tons this year. Income rose 50% to an all-time high of $2.3 billion last year, and analysts look for 11% yearly earnings growth during the next five years.

Dividend growth has been erratic. Southern Copper made an unusual move by cutting the cash dividend in last year's fourth quarter and adding a stock dividend. With the stock dividend factored in, the fourth-quarter dividend totaled 54 cents ($2.16 annualized). Southern Copper paid an all-cash quarterly dividend of 54 cents during this year's March quarter, giving the stock a yield of 6.6% at current prices. Cash flow coverage is comfortable at 4.5 times the new dividend rate.

Investment Ideas

Risks to consider: Veolia's plan for improving its balance sheet involves asset sales, but finding buyers could prove challenging if Europe's economy weakens. Permian Basin Royalty Trust owns a finite amount of resources. As these are gradually depleted, distributions will decline and the trust will eventually cease to exist.

Action to take: My top pick for conservative investors is Permian Basin Royalty Trust. The trust pays a generous distribution supported by high-quality, low risk assets. Southern Copper is slightly more risky, but a good choice for investors who want income and leverage to rising copper prices. Veolia is a much more risky pick. Earnings gains are contingent on restructuring, but Veolia offers the highest yield and upside potential.

Lisa Springer does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.

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