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BHP Billiton Limited: A more reliable dividend payer than the major banks?

The four most dangerous words in the share market are “this time is different”.

Traditionally, the phrases “dividend support” and “mining shares” rarely appear in the same sentence. However, companies such as BHP Billiton (ASX: BHP), Rio Tinto (ASX: RIO) and Fortescue Metals Group (ASX: FMG) have an increasing production profile, reduced capital expenditure and increasingly large free cash flows.

According to broker UBS, the mining sector is set to generate around U.S. $40 billion in free cash flow in 2014. By comparison during 2012, free cash flow fell U.S. $10 billion. This will likely result in reliable and increasing dividend payments.

Historically, a relatively safe time to purchase BHP shares has been at a dividend yield of 4%. This entry point sharply reduces any downside potential. According to respected Sky Business commentator Rudi Filapek-Vandyck, BHP shares have bounced off this level on 10 different occasions since April 2013.

He states that “BHP is one of the most secure dividend payers in the local share market. Since 2003, the company has increased annual dividend payments to shareholders, every year without interruption, including throughout the depths of the Global Financial Crisis. Not even the banks… can match such a track record.”

He adds, “every analyst, whether bullish or not on iron ore prices this year and the next 10 years, believes BHP’s dividend track record will remain unblemished for many years into the future. In other words: this is one of the most solid elements in the share market that investors can count on”.

So a step change may be occurring whereby mining companies, formerly not known for dividends, are caught up in the ongoing hunt for yield. The demographics of the aging population and the increasing use of self-managed superannuation funds may dictate that yield will remain a primary objective for resource companies.

Foolish takeaway

In my opinion, a fundamental change in resource company capital management policies could lead yield-hungry investors to take a new look at selected resource stocks. My long-held preference has been for Fortescue Metals Group, which has surprised the market for the second consecutive reporting season with a dividend in excess of expectations.

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Motley Fool contributor Mark Woodruff owns shares in Fortescue Metals Group.

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