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Why you could expect a five-fold increase in dividends from this ASX stock this year

Dividend-hungry investors will be salivating at the thought that Independence Group NL (ASX: IGO) could pay a dividend that’s five times higher this financial year than what it paid in FY18.

While investors weren’t too excited when the diversified miner announced the change in dividend policy with its quarterly production report yesterday, the Independence Group share price jumped 2.3% this morning to $4.07 even as the mining sector slumped into the red.

The BHP Billiton Limited (ASX: BHP) share price is down 0.7% at $31.44 while the Rio Tinto Limited (ASX: RIO) share price is largely flat at the time of writing as the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index fell 0.3%.

Perhaps investors were put off by the sharp rise in production costs at Independence Group’s Nova mine in the September quarter that was largely driven by higher fuel costs, lower production of by-products and higher non-recurring maintenance costs.

The C1 cash cost at its nickel, copper and cobalt Nova project is particularly alarming as it surged 55% over the previous quarter to $2.78 a pound. That’s 45% ahead of what Macquarie Group Ltd (ASX: MQG) had forecast.

The good news is that management is sticking with its full-year C1 cost guidance of $1.65 to $2 a pound and that means costs should fall significantly in the coming quarters.

Production at Nova and its Tropicana gold mine are largely in line with what the market was expecting, and rising costs were less of an issue at Tropicana.

Cost inflation probably overshadowed comments from management about changes to its dividend policy.

Independence Group is moving away from tying its dividend payments to earnings and using cashflow as a benchmark instead.

That would be welcomed news for shareholders as the latest quarterly cashflow reported by the miner is actually very good.

While underlying earnings before interest, tax, depreciation and amortisation (EBITDA) crashed 52% in 1QFY19 from the previous quarter to $62.9 million, cash from operating activities jumped 46% to $108.1 million.

The strong cashflow generation is expected to continue and Macquarie is forecasting total dividends to hit 15 cents a share in FY19 compared to the 3 cents the miner paid the year before.

The dividend rise doesn’t stop there. Dividends should jump to 21 cents a share in FY20 and that puts the stock on a sustainable yield of over 5% before franking.

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Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited, Macquarie Group Limited, and Rio Tinto Ltd. The Motley Fool Australia has no position in any of the stocks mentioned. 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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