I think that having a little exposure to the resources sector can be a great way to diversify your portfolio and put it in a position to potentially outperform the market.
Given the abundance of minerals in Australia, there is unsurprisingly a great deal for investors to choose from in the resources sector.
Three of the most popular resources shares are listed below. Are they in the buy zone?
BHP Group (ASX: BHP)
My top pick in the resources sector remains this mining giant. I think the company's world class operations and the sizeable free cash flow they generate make it a stand out option for investors looking to gain exposure to the sector. In addition to this, BHP's shares offer an above-average dividend yield. Excluding its recent special dividend, BHP's shares currently provide a trailing fully franked 4.9% dividend yield. If the U.S. and China avoid a trade war, then I expect BHP to benefit from strong demand for the key commodities it produces, potentially allowing it to grow this dividend further in FY 2019.
Fortescue Metals Group Limited (ASX: FMG)
Fortescue Metals is one of Australia's leading iron ore producers. However, unlike BHP, Fortescue's focus is on low grade iron ore. Demand for low grade iron ore has fallen significantly over the last 12 months due to China's preference for the less-polluting high grade ore. While things have been improving, a note out of Goldman Sachs this morning cast doubt on a sustained recovery of low grade prices. Its analysts expect prices to fall in the second quarter, which could weigh heavily on Fortescue's financial performance and investor sentiment. In light of this, I'm going to avoid Fortescue's shares for the time being.
Rio Tinto Limited (ASX: RIO)
Instead of Fortescue, I would suggest investors gain their iron ore exposure through Rio Tinto. I believe it is one of the highest quality miners in the world. It operations are also generating significant free cash flows that I believe are likely to be returned to shareholders in the form of buybacks and dividends. Rio Tinto's shares currently provide a trailing fully franked 5% dividend.
