The mining sector offers attractive, and in some cases overlooked, opportunities for income investors, says Berenberg.
Although the dominant focus for income is on large-cap names, the investment bank suggested that diversification into smaller, higher-yielding names "can offer potential for outperformance".
These are: Anglo Pacific Group PLC, Atalaya Mining, Central Asia Metals PLC, Endeavour Mining PLC, Kenmare Resources PLC, Pan African Resources PLC, Polymetal International PLC and Tharisa PLC.
Despite the mining sector's cyclical nature, the investment bank identified that its strategists and analysts believe can offer "attractive income characteristics as well as capital return growth (in the form of higher share prices or additional shareholder returns through buybacks)".
The analysts were also upbeat on the income potential from diversified miners Anglo American PLC (LSE:AAL), BHP PLC and Rio Tinto PLC (LSE:RIO), they highlighted eight names that offer attractive yields, strong balance sheets and attractive commodity backdrops, coupled with share price upside.
Equity strategists at the bank had noted how challenging it can be for investors to find a positive real yield as a result of rising inflation.
Berenberg noted how the mining sector has, in recent years, been a strong performer in the UK income space, with the diversified miners offering yields of circa 7% over 2016-21.
"Recently, strong commodity prices and high dividends, coupled with reduced payouts from other sectors (banks, travel and leisure) due to COVID-19, have resulted in mining rising to 23% of the UK dividend wallet."
BHP's unification will reduce mining's relevance in the UK as it leaves the FTSE 100, the bank said, as will dividend resumptions from other sectors as the recovery takes hold.
"However, with the FTSE All-Share offering a yield of 3.1%, our basket of miners offers a three-year forward yield of 5.9% (6.4% ex-diversifieds), with plenty of spot upside, so we think that remaining overweight miners in an income portfolio is fair."
The big diversified miners "still have a role to play", with BHP still offering a "compelling" 6% yield, Rio Tinto is felt likely to become the "designated large cap mining income name in London", with a yield of 4.6%, increasing to 8.7% with spot.
"Anglo American is more of a growth name and its payout lags diversified peers' at 40% of earnings, hence a c3.4% yield; this rises to 7.7% at spot and offers further upside."