2 Mining Dividends to Buy and 1 to Avoid

Unless you've been living under a rock for the past five years, you're aware of the monumental rise, then fall, then rise again of metal prices. The recession looked like it would squash metal prices for years to come, but that turned out to be quite the opposite. Gold is trading near an all-time high, while silver is just months removed from a multi-decade high. Likewise, aluminum and copper continue to trade very much near their all-time highs, partly from investor speculation but mostly from steady Chinese demand.

With investor interest in metals at its highest in years, many companies in the mining sector have turned to attracting investors by paying out a dividend. We don't often think of mining companies when we think of receiving a dividend, but make no mistake about it, there are companies in this sector making noise on the dividend front -- and you should be taking notice. On the flip side, there's one company in particular whose payout just may prove too good to be true.

Newmont Mining (NYSE: NEM  ) -- Trust it
This isn't Las Vegas, but Newmont Mining is giving its shareholders the potential to cash in just like the pros.

As far as precious metals go, gold is the go-to staple. Even after quadrupling over the past decade, gold prices remain relatively stable when compared with the wild swings observed in the silver or copper markets. Unlike these other metals, gold is also used as a hedge against inflation and declining currencies. It's for this reason that many of the largest countries in the world keep sizable gold stockpiles. Being a finite resource, gold itself doesn't depreciate since governments can't simply make as much of it as they'd like.

This brings us to the main point of why Newmont's dividend is so special. In April, the company announced it would begin paying out a dividend directly tied to the spot price of gold. Basing its spot price on the average selling price from the prior quarter, Newmont will increase or decrease the dividend by $0.20 for every $100 change in the price of gold. This allows investors a phenomenal way of getting more gold exposure without actually buying physical gold -- but it also allows for considerable doubt about future payouts if spot prices begin to tumble.

My basis for trusting gold relies on both its value as an inflationary hedge and as a hedge against a weakening dollar and euro. Newmont is only on pace to deliver a 1.5% yield this year, but that figure could significantly rise in the coming years assuming that gold continues to trend higher. This looks like a dividend you can trust moving forward.

Silver Wheaton (NYSE: SLW  ) -- Trust it
Touted by fellow Fool Christopher Barker as possibly the most profitable company in the world, Silver Wheaton seems like a logical choice to make the list despite only recently introducing a quarterly dividend.

The silver sector is pretty much a graveyard of dividend-paying companies. Coeur d'Alene Mines (NYSE: CDE  ) hasn't paid out a dividend since 1997, while investors in Hecla Mining (NYSE: HL  ) need to go all the way back to 1990 to find the company's last quarterly payout. Oddly enough, Silvercorp Metals' (NYSE: SVM  ) payout of 0.9% is the best yield in the silver sector -- for now, that is.

Silver Wheaton's diverse mix of metals, headed by silver, has propelled this giant to a trailing-12-month profit margin of a whopping 73%. Based on the company's current quarterly distribution of $0.03, the 2011 payout should only be 6%, leaving plenty of room for future dividend increases.

Very few companies in precious metals sectors have the product diversity or the clout Silver Wheaton wields. Its 0.4% dividend should be significantly higher in one or two years' time, mark my words.

Southern Copper (Nasdaq: SCCO  ) -- Avoid it
Who would be crazy enough to advocate avoiding a copper company slated to grow at 18% over the next five years and paying out a 7.2% dividend? Just me.

The copper sector only has two companies currently paying a dividend, Southern Copper and Freeport McMcoRan (NYSE: FCX  ) , which currently sports a 2% yield. Copper prices rely heavily on demand from China for price support, and recent data from China could indicate the China bubble may be getting ready to pop. While gold and, to some extent, silver have value as a currency hedge, copper does not. Copper prices would be in for a crushing blow if China's economy were to take a turn downward. Prices have also struggled to stay above the $4 range on multiple occasions over the past few years. Time may be running out on this popular metal, and that could mean bad news for Southern Copper.

Within the past month, earnings estimates for Southern Copper have been falling. This is particularly bad news for shareholders, considering that Southern Copper's payout ratio sits at a nosebleed high of 93%. Its dividend seems highly unstable given the possibility of a China slowdown and an already high payout ratio. For that reason, Southern Copper could be on the precipice of a dividend haircut.

Foolish roundup
Mining sector dividends may not be a lot to look at right now, but after years of record metal prices and, in many cases, record profits for miners, these dividends are on the launching pad readying for blast off. Just like with any sector, one of the best metrics to keep your eye on is the payout ratio; it'll give you insight as to whether a dividend is likely to move higher or if it's probably unsustainable.

What is your favorite dividend play from the mining sector? Share your thoughts in the comments section below and consider adding Newmont Mining, Silver Wheaton, and Southern Copper to your watchlist to keep up on the latest news in the mining sector.

Consider the two stocks above along with the 13 names in a free report from The Motley Fool's expert analysts, "13 High-Yielding Stocks to Buy Today." A senior retail analyst dubbed one of the picks as "the dividend play of a lifetime." Tens of thousands have requested access to this report, and today you can download it at no cost. To get instant access to the names of these 13 high yielders, simply click here -- it's free.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that allows you to pan for transparency, one contributor at a time.


Read/Post Comments (4) | Recommend This Article (17)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 27, 2011, at 12:52 PM, jrs1000 wrote:

    Yamana Gold is raising their dividend to 18 cents a year starting next quarter, which works out to a 1.6% current dividend.

    And my guess is that they'll at least double that dividend rate in the next few years with gold prices continuing to rise over the years, and four new mines coming on-line in 2012 and 2013.

    With Yamana you get good growth in gold production, earnings, and dividends.

  • Report this Comment On June 27, 2011, at 1:08 PM, TMFUltraLong wrote:

    jrs1000,

    Yamana was the other potential company I was considering. If this was 3 stocks to buy and 1 to avoid, Yamana would have made the list. You just have a longer history of dividends with Newmont and more stable growth with Silver Wheaton so that's why those two won out.

    TMFUltraLong

  • Report this Comment On June 27, 2011, at 4:41 PM, jrs1000 wrote:

    Sean,

    I like Newmont and Silver Wheaton also, and I already own 6,000 shares of Newmont.

    I just threw in Yamana as it's another good low cost gold miner with a good growing dividend. I own 25,000 shares of Yamana.

  • Report this Comment On June 29, 2011, at 12:50 PM, dunkmaster wrote:

    yikes...how tacky...

    in "polite" investing circles we tend to just say we are "long a stock"...not spell out our net worth/position.

    fyi...I am not trying to be hurtful but if no one says then you might never know.

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