The EQM Natural Resources Dividend Income ETF (NDIV) returned 0.21% in the second quarter (Q2) of 2024 while the Morningstar Global Upstream Natural Resources Index returned only -0.90%.
Second quarter stock market performance continued its upward trend, albeit at a slower pace than the first quarter of the year, with the S&P 500 TR Index advancing another 4.3%. YTD the market has risen 15.3% despite higher for longer interest rates and mixed economic data. Artificial intelligence stocks continue to be the fuel propelling market gains, with the technology and communication services sectors leading the way. The Energy sector declined 2.4% during the quarter, while the Materials sector was also down 4.5%.
NDIV’s dividend weighting methodology, focused on identifying companies with strong cash flows, performed better than its underlying sector exposure. Because natural resource companies are not spending money on immediate capacity, balance sheets have become debt free, and free cash flow is being returned to shareholders in the form of 1) increasing fixed dividends, 2) high variable or special dividends, and 3) share repurchases. There has also been M&A activity, which has been accretive to shareholders. Both WTI and Brent crude oil prices rose during the quarter, up 3.9% and 4.0% respectively.
Among NDIV’s top performers in Q2 were Western Midstream Partners (+14.6%), DT Midstream (+17.5%), and Newmont Corp (+21.2%).1 Click here for NDIV's top 10 holdings.
Midstream energy names are an overlooked beneficiary of the AI boom thanks to the rising energy needs of data centers. According to Goldman Sachs research, the AI boom will create a surge in data center energy demand upwards of 160% rise in power consumption, with natural gas expected to make up 60% of the energy mix through 2030.
Western Midstream reported strong first quarter results and raised its quarterly dividend by 52%. Free cash flow came in at 225 million, representing an increase of nearly 60% over last year, helped by higher natural gas volumes. Western Midstream also closed the sale of five non-core assets, collecting about $790 million in proceeds. It took some of that cash and retired $150 million in debt.
DT Midstream is another midstream name reporting strong Q1 results. DT is persuing an aggressive buildout in Louisiana and Appalacia hoping to take advantage of the spike in demand for LNG. The company is also poised to take advantage of potential M&A opportunities in addition to targeting 5-7% annual dividend growth.
Newmont Corp, the world’s top gold miner, benefited during the quarter from the rise in the price of gold. Gold prices have risen in the environment of persistent inflation and high interest rates. Spot gold prices increased 5.3% during the quarter. The stock was recently upgraded to a Buy rating by UBS on expectations for rising earnings due to higher gold prices. The firm also expects divestments of $2-4B over the next year to boost cash returns.
Detractors on performance for the period were Sasol Ltd (-12.2%) and ICL Group Ltd (-16.9%).
Sasol Limited, a South African producer of oil and chemical products, pays an annual dividend yield of 12.8%. The share prices declined due to South African business headwinds including decarbonization requirements, supply chain disruptions, and falling coal quality. Weak chemical margins have pressured profitability, despite higher oil price and refining margins.
ICL Group, an Israeli manufacture of agricultural chemicals and fertilizer, missed revenue expectations, but EBITDA beat estimates as profit margins contracted less than expected, despite potash being the main laggard. But the company’s quarterly dividend declined slightly, causing shares to decline post the announcement.
Launched in August 2022, NDIV is comprised of dividend-paying U.S. exchange-listed equities5 operating primarily in the natural resource and commodity-related industries such as energy, chemicals, agriculture, metals & mining, paper products, and timber. The ETF offers the potential for “inflation proof” income and increased top performers shareholder yield.
Click here to see yield and performance tables.
All data as of 6/30/2024. Subject to change at any time. Fund holdings should not be considered recommendations to buy or sell any security.View Current Complete Holdings
Index Definitions:
The EQM Natural Resources Dividend Income Index (NDIVITR) is a gross total return index that seeks to provide investment exposure to dividend-paying equity securities of global companies operating primarily in the natural resource and commodity-related industries.
Morningstar® Global Upstream Natural Resources Index measures the performance of stocks issued by companies that have significant business operations in the ownership, management and/or production of natural resources in energy, agriculture, precious or industrial metals, timber and water resources sectors as defined by Morningstar’s industry classification standards. The Standard & Poor's (S&P) 500 Total Return Index is an unmanaged, market-capitalization-weighted index of the 500 largest U.S. publicly traded companies by market value, and assumes distributions are reinvested back into the index. It does not include fees or expenses. It is not possible to invest directly in an index.
1All percentages shown indicate total return of the sector for the month.
2https://www.etftrends.com/energy-infrastructure-channel/midstream-overlooked-beneficiary-ai-boom/