If you buy gold bars or an alternative, like the SPDR Gold Shares (NYSE:GLD) exchange-traded fund, you will certainly benefit from the rise in the gold price. For the most part, these investments have proved quite profitable over the years.
The problem is that you will never get any regular income.
Of course, this isn’t an issue with gold mining stocks. Some of the top operators that pay dividends include AngloGold Ashanti (NYSE:AU), Barrick Gold (NYSE:ABX), Gold Fields (NYSE:GFI) and Kinross Gold (NYSE:KGC).
But there’s a hitch — even though dividends have been increasing over the past couple years, the yields are still fairly paltry, ranging from 0.5% to 1.5%. Part of the problem is that miners want to preserve cash for acquisitions as well as capital investments — it’s an expensive business and subject to lots of volatility.
But one miner, Newmont Mining (NYSE:NEM), has developed a clever structure to give its investors a bonus for an increase in the price of gold. It is called the gold-price-linked dividend. Essentially, for every $100 increase in the price of gold, Newmont will increase the dividend by 20 cents a share.
In other words, if there is bull rally, shareholders will get a nice boost. But if there is a correction, Newmont will be able to preserve its cash. At the same time, the dividend yield will still be about 1.5%. It’s a nice balance for the company and its investors.
However, it’s usually not a good idea to only focus on a stock’s income potential. It makes sense to invest in companies with strong fundamentals. The good news is that Newmont fits the bill. It has a diverse set of properties in areas like the U.S., Peru, Australia/New Zealand, Ghana, Indonesia and Mexico. These generate substantial amounts of gold as well as copper.
In the latest quarter, Newmont posted record operating cash flows of $989 million, up 36% over the past year. Revenue was up 10%.
However, there are risk factors. Its operations in Indonesia and Africa are vulnerable to political instability. There are also cost pressures, such as from water, energy and labor. But these are the kinds of things facing all mining companies.
And gold may be poised for another bull run. After all, the European debt situation still looks dicey. What’s more, there continues to be fighting with the Aug. 2 deadline for the increase of the U.S. debt limit.
Thus, if gold does have a nice move, Newmont’s shareholders should benefit nicely, driven by both stock gains and a higher dividend payout.
Tom Taulli’s latest book is “All About Short Selling” and he has an upcoming book called “All About Commodities.” You can find him at Twitter account @ttaulli. He does not own a position in any of the stocks named here.
