The Hunt for Yield Is On: Mining and Energy’s Income Plays

Earlier in the month, I made the case that Australian property is becoming a harder asset to love on a pure income basis, squeezed from both ends; state and federal governments all looking to get a larger piece of this asset pie.

We looked at Victoria’s land tax overhaul, a benchmark for others to follow as state governments hunt for new revenue sources to fund their reckless spending habits.

You can revisit that edition here.

No doubt, real estate investors are a juicy, easy target, unlikely to win much sympathy from the broader population.

But they’re also being hit at the Federal level, with renewed threats to changes to negative gearing.

So, with all this multi-pronged hostility, where else can you go for income generation?

Strong-yielding stocks are looking better than ever if you’re aiming for a self-funded retirement.

We looked at the US ‘dividend aristocrats’ ETF [NYSE: NOBL] as one credible alternative for investors chasing steady, growing income.

I suggested this could form your core portfolio, say 80% of your investment wealth. Although at current valuations, I’d be cautious about buying anything US equity-related right now.

So, what about that final 20%?

Well, that’s something you can put to work, right now.

What I suggested as specific stock opportunities, particularly in mining and energy.

That’s because it’s a sector that still offers value, and value often translates into higher yields in markets. So let’s look at some of those examples, now:

Royalty companies: paid
without lifting a shovel

The royalty and streaming model is one of the more elegant structures in the mining industry.

I’ve described this business model as having an unfair advantage over traditional mining stocks.

One reason for that: royalty stocks hold the right to future profits from a mine without having to foot any of the initial capex or ongoing operating costs.

The agreement that landed them this royalty stream is usually down to good timing and solid due diligence, like strategically buying a chunk of land that sits on the same geological structure as an existing mine.

As the mine expands and falls into the royalty holders’ parcel, the operator is obliged to pay a share of the profits.

Instead of operating a mine, these companies simply gain a slice of future production revenue. No operating costs, no blowouts, no equipment to maintain. Just a cheque.

As I said, it’s a unique but potentially extremely profitable business model, but it requires a team of highly specialised geologists who understand the terrain well.

This is one example of what I look for, for my premium members: stock-specific names that are building a future cash cow through strategic land purchases… In other words, mining royalties.

In fact, I recommended another royalty stock for our model portfolio earlier this month as we build our own list of ‘mining aristocrats.’

You can check those out here.

Oil and gas royalties

Another unique option that you probably haven’t heard about are royalty companies tied to the oil and gas sector.

Some of these companies are currently yielding as high as 10%, occasionally more.

The catch is that these are depleting, fixed-life assets with no reinvestment or growth built in.

Distributions move directly with commodity prices and production volumes, and can be cut or suspended entirely when conditions turn, as happened with the San Juan Basin Royalty Trust, which has paused payouts since mid-2024.

These are best approached opportunistically, when the sector is out of favour, and pricing is at its worst, rather than held as a core income position.

And that’s the core principle here…

Mining majors, like FMG, BHP, and RIO, were all once strongly yielding stock plays.

But given the share price run-up, those miners are yielding far less than they did two years ago.

Bottom line: if you focus on out-of-favour commodities, you’re positioned for two tailwinds… Potential growth should a recovery emerge, plus being paid while you wait.

Oil and gas producers are a good example of that and still offer the double tailwind of growth potential and relatively high yields.

Again, it’s another reason why we’ve been building a list of O&G yield plays that you can check out here.

Building a yield portfolio

As property tax settings continue to tighten, it might be time to start exploring alternatives.

A blend of steady, growing dividend aristocrats alongside select, higher-yielding royalty and resources names offers income investors an alternative that doesn’t rely on tenants paying on time!

Until next time.