For many investors, a reliable income stream from dividends is the holy grail. Right now, that holy grail is largely made up of copper, gold and even vanadium – as much of the UK stock market’s dividend growth comes from the mining and resources sector.

Mining giants Glencore and BHP have both announced record dividends in recent days.

And while some investors may have trouble with their environmental credentials, it’s important to remember that it’s these companies that supply some of the materials that are driving the transformation of the global economy towards a more sustainable economy.

This is a point raised by Rob Crayfourd, a resource fund manager at New City Investment Managers. He says: “When people talk about energy transition, they think of hydrogen, lithium for batteries, solar and wind. But most of the listed companies involved in this process have stock prices trading at high levels.

“However, the mining companies that produce the materials these companies use have stock prices that could be considered undervalued, especially given the strong earnings they generate.”

Although investing in mining stocks is not without risks, they could give your portfolio a boost in income.

Unearth values ​​with a rich heritage

Unlike some tech stocks today, mining and resource stocks listed on the London Stock Exchange have a long history. Understanding where they came from and how they have changed is helpful in deciding which stocks are right for you and what the risks of investing in the sector are.

The first thing to note is that you probably already have exposure to mining and commodities stocks if you are an investor in UK funds or an index fund.

Jason Hollands, managing director of wealth management platform BestInvest, said “basic resource” companies make up 8% of the FTSE100 index by value.

The miners included in this index have a rich history. For example, BHP Billiton, which has its roots in the ownership company of Broken Hill in New South Wales, has grown and diversified into a giant with mining interests around the world.

Meanwhile, Rio Tinto was founded in 1873 by investors who wanted to reopen old copper mines near the “Red River” (Rio Tinto in Spanish) near Huelva in southern Spain. Even Glencore, a relative newcomer to the stock market, was created in a different world from today, by commodity experts eager to trade zinc.

Miners have transformed their stated purpose over time. Away from Australia’s gold rush world, BHP’s website now says it provides products to ‘help build a brighter and brighter future’, while Rio Tinto says ‘we produce essential materials to human progress”. Glencore, meanwhile, promises that it “responsibly sources the commodities that power everyday life”.

Yet legacy problems plague some mining companies. Glencore announced in recent days that it had set aside £1billion to deal with bribery and corruption investigations, while Rio Tinto released a damning report on its work culture, citing systemic bullying, sexual harassment and racism.

So as these companies transform into sustainable ones, there is always the risk that their history – and the continued use of fossil fuels in metal mining – will hamper their attempts to move forward.

Tapping into resources for a sustainable future

Despite these issues, miners have a lot to gain in the current environment.

The price of mining stocks is strongly correlated to that of commodities, which have risen sharply in recent months.

The miners have also done a good job in recent years of being more cost disciplined, which has allowed them to pay hefty dividends to their shareholders.

Chris Beauchamp, chief mining analyst at online trading platform IG, said: “The steady stream of dividends the sector offers investors will only become more attractive.”

BHP currently pays shareholders an annual income equivalent to 10% of their investment, while Anglo American pays 5%. Shares of BHP are up 13.5% over the past 12 months, while those of Anglo are up almost 28%.

Mark Smith, who runs investment fund Amati Specialist Metals, says high metal prices are likely to continue in the near term as metals are needed to move towards a more renewable future. “There will be a role for all these metal miners in this new green, decarbonized world,” he predicts.

IG’s Beauchamp says the best approach investors can take is to buy into big mining companies that extract a variety of commodities.

He adds: “It always makes sense to stick with large diversified miners with their wide range of activities and geographical exposure, offering a measure of protection against any slowdown in individual demand for commodities.”

Hollands of BestInvest thinks Anglo American represents one of the best investment opportunities. He says, “His interests cover iron ore, copper, platinum and diamonds. By 2024, around 50% of its revenue will come from copper, a metal that is a key component of electric vehicle batteries, as well as semiconductor wiring.

He adds: “While the future is uncertain, what is certain is that there will be more electric cars on the roads and semiconductors will be used in all facets of our lives, from healthcare from health to artificial intelligence.

Try funds that invest in profitable metals

If you prefer not to buy individual stocks, there are many investment funds that will expose you to rising metal prices.

Darius McDermott, managing director of wealth management platform Chelsea Financial Services, suggests that BlackRock World Mining Trust is a good way to gain exposure to rising copper prices. Its main holdings are in the Brazilian mining company Vale, BHP, Glencore and Anglo American.

Matthew Read of investment trust research group QuotedData favors the CQS Natural Resources Growth & Income fund because of its ability to track down less well-researched commodity companies.

Hollands says a more diversified approach is to buy a fund such as RWC UK Equity Income, where 10% of its portfolio is invested in commodity stocks. Its largest position is a 5.9% investment in Anglo American, but it also owns the Newmont and Barrick Gold mines.

Be prepared for a bumpy ride

Whichever way you choose to invest in mining stocks, it is important to be aware that it is unlikely to be a smooth and uneventful course.

“Mining stocks are notoriously volatile,” warns Hollands. “Because the cost of mining metals is high, when commodity prices change even slightly, it can have a major impact on profits.”

He adds, “Essentially, mining stocks amplify movements in underlying commodity prices. Specialty mining funds therefore carry considerable risk and are not for the faint-hearted.

“Buy them only as part of a larger investment portfolio.”