Finding Big Dividends In Gold

By Aaron Levitt | December 05, 2011 AAA

With interest rates still at unheard of lows, income seekers have had to get creative with their investments. New income asset classes like Master Limited Partnerships (MLPs) and bond varieties are now becoming common place in many portfolios. In addition, many investors have once again returned to equity income as many stock dividends yields are well above treasuries. Funds like the PowerShares Hi-Yield Equity Dividend Achievers (ARCA:PEY) have seen their assets under management explode, and have become popular destinations for portfolios over the last two years. However, while most equity income seekers tend to focus on sectors like consumer staples and healthcare, a historically low paying sector could become the dividend champions of tomorrow.

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Big Bucks In Mining
For income seeking investors, the precious metal mining sector hasn't traditionally been on the top of their go-to lists. However, the recent long-term surge in gold prices is changing all of that. A variety of top-tier gold producers have now linked their dividend payments to the price of gold. Many premier mining firms can pull gold out of the ground for less than $500 an ounce. With gold prices well above $1,600 an ounce, the remaining spread is all gravy, and more firms are starting to return that profit to shareholders. In an effort to help bring back capital to the sector and away from physical bullion ETFs like the SPDR Gold Shares (ARCA:GLD), a variety of mining firms are now linking their dividend policies directly with the price of gold. South African miner Harmony Gold Mining (NYSE:HMY) is the latest to announce such a policy.

Of the firms who mine at least 400,000 ounces of gold annually, 13 firms will pay nearly $2 billion in dividends this year, up from $1.45 billion in 2010. This is the largest dividend payout by the sector in history. Overall, dividend payments are up nearly 75% year-over-year, versus the 26% increase in 2010. In addition, analysts estimate that 2012 will see dividend increases of an additional 26% as the sector is forecasting a gold price-per-ounce of around $1,700. With some market pundits calling for $2,000, $3,000 and even $5,000 for an ounce of gold, the dividend potential is enormous.

For investors, the miner's new dividend potential and the fact that these companies act as leveraged plays on gold prices, gives the gold miners a unique risk-return profile relative to physical gold prices. While the yields aren't utility sized yet, the sector can now offer both real income potential as well as a growth element to a portfolio. (For a reading on how gold is used to hedge against financial uncertainty, read How Much Disaster Can Gold Hedge?)

Adding Some Golden Dividends
With some analysts calling the gold linked dividend policies a "game changer" for the sector, investors looking for income might want to consider adding some gold to the equity income side of a portfolio. The broad based Market Vectors Gold Miners ETF (ARCA:GDX) only yields around 0.68% as of December 5th. However, bigger and better dividends can be had in individual firms. Below are a few picks.

Back in April, Newmont Mining (NYSE:NEM) became the first firm to announce that it would link its dividends to the price of gold. The company's current yield sits around 2.1%, but analysts estimate that if gold hits $2,000 per ounce, Newmont's shares would yield an impressive 3.9%. Similarly, Eldorado Gold (NYSE:EGO) which recently announced a gold linked dividend policy, would now yield over 1%.

With many financial obligations occurring monthly, investors may be interested in both low-cost leader Goldcorp (NYSE:GG) and smaller producer Gold Resource (AMEX:GORO). Both pay monthly dividends and have recently been raising their payments. The firms yield 0.8 and 3%, respectively.

The Bottom Line
With gold prices remaining high and many pundits predicting that they will remain high, for the foreseeable future, the gold mining sector could be an income seekers dream. With many firms now linking their dividend payments to the price of the precious metals, distributions are on the rise. For investors, betting on firms like Yamana Gold (NYSE:AUY) and Compania de Minas Buenaventura SA (NYSE:BVN), increasing dividends could be the best blend of growth and income.

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At the time of writing, Aaron Levitt did not own shares in any of the companies mentioned in this article.

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