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Tuesday, September 27, 2011

There's Gold In Them Thar Dividend Stocks

With the U.S. debt quickly approaching 100% of the GDP and the declining financial condition of European countries, we are seeing some very jittery financial markets. Whether you live in the U.S. or are a citizen of the world, we should all be concerned with the current financial condition of the world, and many people are. This is evidenced by the significant run up in gold.

At $1,800 per ounce gold seems expensive to some, but for others, such as Jim Rogers, the expectation is that the price of gold will continue upward past $2,000 per ounce. Who's right? What can investors do to add exposure to precious metals when they are uncomfortable buying at these historically high levels?

One place I am looking is precious metals mining stocks. Contrary to the metals they mine, many of these stocks are trading at the lower end of historic levels.

Wanting to further reduce risk, I am only looking at stocks that pay a dividend. Many of the top mining companies are expanding and growing their dividends. Some are linking their dividend payments to the metal they mine.

Here are some stocks I am looking at:

Newmont Mining Corp. (NEM)
P/E: 14 | Yield: 1.8%
Newmont Mining Corporation, together with its subsidiaries, engages in the acquisition, exploration, and production of gold and copper properties. NMT has a dividend policy that links its dividend to the price of gold. Recently, the company enhanced its dividend policy. The enhanced policy will provide an additional step up of 7.5 cents per share when the Company's realized gold price for a quarter exceeds $1,700 per ounce and a further step up of 2.5 cents per share (10 cents in total compared to the existing policy) when the Company's realized gold price for a quarter exceeds $2,000.

Hecla Mining Co. (HL)
P/E: 20 | Yield: 2.1%
Hecla Mining Company, together with its subsidiaries, engages in the discovery, acquisition, development, production, and marketing of silver, gold, lead, and zinc. Following NMT's lead, HL announced last week that it adopted a common stock dividend policy that links dividend payments to Hecla's average quarterly realized silver price in the preceding quarter. The initial quarterly dividend under the policy is expected to be $0.03 per share of common stock ($0.12 per year), if Hecla's average realized silver price for the third quarter is $40.00 per ounce. All dividends, including those in the third quarter, would increase or decrease by $0.01 per share ($0.04 annually) for each $5.00 per ounce incremental increase or decrease in the average realized silver price in the preceding quarter.

Some other companies to consider include:

Barrick Gold Corporation (ABX)
P/E: 12 | Yield: 1.0%
Barrick Gold Corporation primarily engages in the production and sale of gold, as well as related activities such as exploration and mine development worldwide.

Goldcorp Inc. (GG)
P/E: 12 | Yield: 1.0%
Goldcorp Inc. engages in the acquisition, exploration, development, and operation of precious metal properties in Canada, the United States, Mexico, and Central and South America.

Freeport-McMoRan Copper & Gold Inc. (FCX)
P/E: 5 | Yield: 3.1%
Freeport-McMoRan Copper & Gold Inc. engages in the exploration, mining, and production of mineral resources. The company primarily explores for copper, gold, molybdenum, silver, and cobalt.

Agnico-Eagle Mines Ltd. (AEM)
P/E: 32 | Yield: 1.0%
Agnico-Eagle Mines Limited, through its subsidiaries, engages in the exploration, development, and production of mineral properties. It explores for gold, silver, zinc, copper, and lead.

Gold Resource Corp (GORO)
P/E: n/a | Yield: 3.0%
Gold Resource Corporation, an exploration stage company, engages in the exploration for and production of gold, silver, precious metals, and base metals, including copper, lead, and zinc primarily in Mexico.

Finally, for those that focus on current yield. Here is an interesting security:

Gabelli Natural Resources, Gold (GNT)
P/E: n/a | Yield: 11.6%
This fund seeks high current income with capital appreciation through investing in a portfolio of securities issued by companies principally engaged in the gold and natural resources sectors and by generating income through an option writing strategy. The Fund intends to make regular monthly cash distributions of all or a portion of its investment company taxable income (which includes ordinary income and short-term capital gains) to common shareholders.

The Fund also intends to make annual distributions of its "net capital gain" (which is the excess of net long-term capital gains over net short-term capital losses). The Fund will pay common shareholders annually all, or at least 90%, of its investment company taxable income.

Keep in mind that gold and silver stocks are not low risk. Mining for precious metals has historically been a boom or bust industry. When investing in such stocks carefully consider the company and how it fits in your overall asset allocation.

Full Disclosure: No position in the aforementioned securities. See a list of all my dividend growth holdings here.

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(Photo Credit)
Tags: [NEM] [HL] [ABX] [GG] [FCX] [AEM] [GORO] [GNT]

5 comments:

  1. There are several funds which write covered calls and seek to provide income as opposed to primarily capital gains.

    ReplyDelete
  2. Gabelli does not indicate any (projected) earnings per share, nor history. What does this 11.6% represent? Estimated increase in value? Since when does that equate with Dividend Stocks? Very misleading!

    ReplyDelete
  3. Anon: Yield has nothing to do with earnings per share. The 11.6% yield is dividend per share dividend by share price.

    I am not sure I understand your comment?

    Best Wishes,
    D4L

    ReplyDelete
  4. D4L, yield is directly correlated to earnings as it is the basis from which to pay dividends. The concern brought forth by Anon is valid by this correlation between yilds and earnings. As for Gabelli, their hedging is a form of a derivative and is one of leverage and is dangerous if the volitility takes out the counter party to that derivative and then takes out Gabelli.
    I am concerned about the motive of the gold majors because of there actions of hedging up to 90% of their futures and their very low profits considering the following. I have oil stocks that pay 7% with gross profit margins of less than 50% when oil is at $100/bbl(Penn West Energy and Canadian Oil Sands). They hedge their exposure to price volitility by selling about 30% to 50% of their future oil extractions at a fixed price. What bothers me about these gold majors is that the costs to extract the metals is only about 33%, hence they have a gross margin of 67% yet their yield is less than half the before mentioned oil/gas producers. I remember looking at the gold majors 4 to 5 years ago when gold was at $800/Toz and they had sold 60% to 90% of their gold futures. The price of gold has doubled but the price of the majors has not and the rule of thumb is that it is a leveraged play, hence the price of the majors should have increased by at least 4 times. This is because the majors knew that the government was manipulating the price and that the intent was to collapse the price to revive the faith in the fiat currencies. I think the majors are of the mind set to not fight the fed on this manipulation and may be in collusion to maintain the integrity of the fiat currencies of the world by helping to sell as much into the market as possible. Now they have meager profits when they should be much greater. I do not like their balance sheets compared to the oils and the capital they get is wasted on paying too much for the minors. It appears many of these major gold miners have sold too much of their future gold extractions as evident by their poor yields for such a risky play. There are very safe companies that have yields of these majors with much less risk and as been seen over the last 5 years the capital gains is less than the metal its self. The majors have failed to convice me of their confidence in the appreciation of gold as their actions show a conflict of interests. Finally, the majors have fields being mined using a model of profitability of less than half the current metal prices and 5 years ago under those prices they paid the same dividends as they do now,yet here we are with the prices of more than double but no increase in yield. I vote no confidence on the majors. As for Gabelli, they appear to be cannabalizing their capital as distributions to increase the yield, hence the loss of share value.

    ReplyDelete

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