I love market volatility! The VIX volatility index has surged more than 70% since late December to heights rarely seen over the last several years as slowing growth in China and interest rate fears threaten the six-year bull market.

As is always the case, in market fear is the opportunity for long-term returns. I’m not predicting a higher or lower market this year but, as a long-term investor, I don’t need to do so to be able to see opportunities.

Three groups top my list for best dividend opportunities of 2016 and produce four stocks with the potential to provide attractive yields and good long-term price appreciation. These three groups were among the hardest hit last year but have some of the strongest long-term fundamentals ahead of them.

Dividend Stocks to Feed the World

Strength in the U.S. dollar and record crop production in the northern hemisphere have brought prices for grains and other agricultural commodities to multi-year lows. The PowerShares DB Agriculture ETF (NYSE: DBA) lost 17% last year and trades for its lowest ever.

But cyclicality is the name of the game in agriculture and 2016 may be the beginning of a surge in crop prices. Producers in the southern hemisphere are already bracing for the La Nina weather phenomenon, which cools waters in the Pacific Ocean bringing flooding below the equator and droughts above it. Of the last 26 El Nino events, 40% have been followed by La Nina the very next year. The previous La Nina began in 2010 and ended in 2012, bringing a drought to the U.S. Midwest that sent corn prices to record highs.

The longer-term picture for crop prices is still better on the need for higher yields to feed the world’s growing population. Research shows that the global grain supply needs to double by 2050 to meet demand, an impossible feat that would require yield growth to double from its current trend.

I hold shares in several companies in the agricultural chemical space but two are particularly strong and among my top picks over the next few years.

Shares of Mosaic Company (NYSE: MOS) plunged 39% last year to an eight-year low as lower crop prices called into question the need for agricultural chemicals. The company is not only a leader in fertilizers but is vertically-integrated into mine supply as well, providing a stable source or raw materials. Even on lower prices, the company generated $1 billion in free cash flow last year and has $1.3 billion in balance sheet cash. Shares pay a healthy 4.4% yield and trade for just 7.4 times trailing earnings.

I highlighted Monsanto (NYSE: MON) in a November post on its leadership in the genetically-modified crop market. The biotech ag giant holds a #1 or #2 market share in its five largest markets and pays a 2.2% yield. Shares are higher since the November article but still a strong pick on long-term fundamentals.

The World will Always Need Energy

Another troubled market makes my list of best bets for 2016 and beyond. Oil prices have fallen further than anyone expected and OPEC has yet to blink in its price war with American producers. As with agriculture, the long-term upside is undeniable and current prices are a rare opportunity in an otherwise expensive stock market.

A Barclays survey found that capital investment in the energy industry was cut 20% last year and could come down another 8% in 2016, marking the first consecutive spending cuts since the mid-80s. The number of producing rigs in North America have been cut by 60% over the last year according to Baker Hughes. Oil and gas production will decrease in 2016 and it may be just as demand starts to outstrip supply.

In fact, BP is forecasting a deficit in oil production of 93 million tons annually by 2020 on strong consumption growth in Asia against sluggish production globally. We may not see $100 oil again for many years but one look at the chart for West Texas Intermediate (WTI) shows once-in-a-decade opportunity.

There could still be more fallout for the energy sector as bonds come due and energy prices struggle to recover. The SPDR S&P Oil & Gas Exploration & Production ETF (NYSE: XOP) is diversified across 63 companies based in the United States. This gives investors needed risk reduction in the industry and the opportunity to wait out higher prices. The recent reversal of the oil export ban should give U.S. producers a competitive advantage against foreign producers when prices do rebound. Shares pay a 2.4% yield and trade for 17.1 times trailing earnings of the companies held, earnings which have come down significantly but should rebound in coming years.

Utilities Offer Upside as well as Safety and Yield

The markets have not been kind lately and I’m adding safety to my list of best dividend stocks for 2016. The utilities sector took a beating last year on fears of a rate hike by the Fed but are looking extremely attractive as investors rush for safety. The Utilities Select Sector SPDR ETF (XLU) was the third-worst performing sector last year after energy and materials but is doing well so far in 2016.

The sector fund pays an attractive yield of 3.7% but I like the higher 4.9% yield on shares of NRG Energy (NYSE: NRG) better. Shares of NRG have plunged under the weight of its alternative energy division but the company has recently split off the segment and is making other moves that will protect cash flow. The company is the largest U.S. independent power producer with assets in nuclear, gas, oil and coal as well as one of the largest retail energy providers. It is cash flow positive and has been aggressively buying back shares ahead of a rebound in the market.

Long-term investors have the benefit of taking the long-view and looking past weak markets in agriculture, energy and utilities. While there’s no guarantee that these three groups will rebound this year, the long-term demand picture is stronger and dividend yields offer plenty of incentive to wait.

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2 Responses to Favorite Dividend Stocks for 2016

  1. I made a little bit of money in early January shorting XOP. Got out just in time.

  2. DL,

    It’s so hard to think about investing in anything even close to oil right now with how horrible the market for it has been. I do however like your review of NRG – they’re definitely going to be at the head of stocks soon when we (I think…) head towards a bear market in the near future.

    -DM

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