Many S&P/ASX 200 Index (ASX: XJO) and All Ordinaries (ASX: XAO) dividend-paying shares have significantly cut or deferred its dividend payments. This is not the case for the likes of BHP Group Ltd (ASX: BHP), Rio Tinto Limited (ASX: RIO) and Fortescue Metals Group Limited (ASX: FMG). With the current iron ore spot price sitting at US$91.13 per tonne and the benefit of a weak Australian dollar, iron ore miners can be expected to continue generating strong cash flows to pay a leading dividend yield.
Iron ore tailwinds
The iron ore spot price has remained resilient throughout the coronavirus pandemic. China iron ore futures hit record peaks this week as industry data showed that port inventory levels had fallen to the lowest in more than 3 years.
Following China's targeted tariffs on Australian sectors such as grain and beef, investors might be concerned that iron ore could be next. However, China and Australia are incredibly co-dependent on iron ore trade. There is no replacement for Australia's iron ore.
This is strengthened by the fact that one of the world's biggest iron ore producing countries, Brazil, is struggling to contain the coronavirus. Brazil's confirmed cases have grown to more than 250,000, with almost 17,000 confirmed deaths. The world's largest iron ore miner, Vale, is also recovering from the fatal dam disaster last year that significantly disrupted its production. This could drastically threaten Brazil's iron ore production and seaborne exports.
China's post-coronavirus stimulus
Infrastructure construction and industrial output has been pivotal to China's economic growth. The market is expecting further infrastructure stimulus measures to be decided in May or June.
In response to the global financial crisis in 2008, the Chinese government unleashed a RMB$4 trillion stimulus package, equivalent to approximately 13% of the country's GDP. This stimulus went towards various government-led projects, with a particular focus on infrastructure such as high speed rail lines, train stations, metro systems and airports. An infrastructure and commodity-reliant stimulus should further support the iron ore spot price and Aussie miners.
Market-leading dividends
Australian miners are positioned front and centre to generate strong cash flows and provide investors with a market-leading dividend.
At the time of writing, Fortescue pays a 7.70% dividend yield, BHP pays a 5.10% dividend yield and Rio Tinto pays a 4.90% dividend yield. Given Fortescue's pure iron ore operations, it has greater exposure to the stable/rising iron ore spot price.
I see a lot of potential in iron ore moving forward and these shares no doubt deserve a place on your watchlist.
