Why I’m avoiding resources shares

After hitting a low around the end of 2015, commodity prices have rebounded and Australian resources companies are now strongly back in favour.

Over that time, the share prices of our biggest miners BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) have been on a stellar run. If you had managed to pick the bottom and purchased each stock at its low, you would be up 135% for BHP, and 125% for Rio Tinto, not including dividends.

Not only that, both are expected to deliver large growth in profits and dividends this year.

So why am I uninterested in these companies?

It has to do with the reliability of those profits, and the inability of resource companies to pay a stable stream of dividends.

We need to remember, it wasn’t all that long ago that BHP cut its dividend by 75%. That certainly doesn’t fill me with confidence for the next time commodity prices start drifting lower.

The unfortunate truth is, these companies don’t even know how much they’re roughly going to be earning over the next 5 years, because they don’t get to set their own prices.  They’re price-takers, not price-makers.

Sure, if you can time it well you could make a fortune. But hopping in and out and timing commodity price cycles is not something I have the skillset for. I’m not convinced many people can forecast this stuff.

It should be obvious, but I’ll point it out anyway. Because of the highly cyclical nature, resource companies make terrible dividend payers. They can definitely pay great income for a couple of years until the cycle turns once again. But if you’re looking for consistent income from large, blue-chip type stocks, resources are not the right place for you.

Foolish takeaway

I personally prefer the more boring and reliable nature of companies like Wesfarmers Ltd (ASX: WES) and Event Hospitality and Entertainment Ltd (ASX: EVT), which have still had strong long-term performance and a far more stable dividend stream.

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Motley Fool contributor Dave Gow owns shares of Event Hospitality & Entertainment and Wesfarmers Limited. The Motley Fool Australia owns shares of and has recommended Event Hospitality & Entertainment and Wesfarmers Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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