Why Gold Miners Are the Best Bet for Income Investors
July 11, 2016 1:14 pm ET
Finding yield is proving to be quite difficult in a market where 30-year Treasuries are paying just 2.12%. While dividend stocks provide an alternative, the S&P 500’s lofty 24.61% price-earnings ratio is significantly higher than its all-time mean of 15.6x earnings. Geopolitical uncertainty and other issues have also led investor to seek out safe-haven investment classes until the ‘Brexit’ and other key global risks play out and the future becomes clearer.
Precious metals like gold and silver have soared 27.4% and 46.2% so far this year, respectively, as investors have sought out safe-haven assets. But unfortunately, gold doesn’t pay any yield at all and it actually costs investors money to hold in the form of expense ratios or storage costs.
Gold Miners & ETFs
Gold miners may be a better investment for investors seeking equity exposure that are also tied to safe-haven investment classes like gold and silver. For instance, Goldman Sachs recently upgraded Gold Fields Ltd. (NYSE: GFI) to a Buy after its 90% move higher over the past year, citing its strong free cash flow yield of 8.9% and positive trends in gold prices. The analyst also listed Randgold Resources Ltd. (NYSE: GOLD) as a top pick given its free cash flow.
Exchange-traded funds (ETFs) provide investors with an easy way to gain access gold mining equities in a diversified manner. According to ETFdb, there are at least 14 different gold mining ETFs with the most popular option being the Market Vectors Gold Miners ETF (NYSE: GDX), which is trading more than 120% higher so far this year. Others like the Direxion Gold Miners ETF (NYSE: NUGT) have performed even better over the same timeframe.
Income investors looking for a combination of a safe-haven asset class, capital gains potential, and a high income may want to consider a subset of the gold mining industry that pays a healthy dividend yield. With gold prices on the rise, these yields could continue to increase over time due to healthy free cash flow generation. These opportunities may be the best way to combat a low-yield environment while retaining upside potential from gold prices.
Royal Gold Inc. (NASDAQ: RGLD) shares have soared nearly 125% so far this year, but the stock still pays a healthy 1.12% dividend yield. Similarly, Franco Nevada Corp. (NYSE: FNV) shares have appreciated more than 70% so far this year while paying a 1.11% dividend yield. These are the highest yielding opportunities in the space, with many other companies are waiting to increase their yields when share prices stabilize.
The Bottom Line
Income investors may want to consider gold mining companies as an alternative to physical gold during times of uncertainty since they offer greater income and upside potential. While gold costs money to hold, many gold miners provide healthy dividend yields that are backed by increasing gold prices. Many have also seen their shares prices already rise nearly 100% over the past year as investors shift funds into the safe-haven asset class.