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Better Buy for Dividend Lovers: Royal Gold, Inc. vs. Newmont Mining

By Reuben Gregg Brewer - Updated Mar 21, 2017 at 11:01AM

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If you love dividends, precious metals players Royal Gold and Newmont Mining could both be winners -- but in vastly different ways.

Gold miner Newmont Mining's (NEM -1.03%) dividend is linked to the price of gold. Precious metals streaming company Royal Gold, Inc. (RGLD -0.20%) has historically increased its dividend every year no matter what gold and silver prices are doing. Both companies clearly care about returning value to investors via dividends, but which one is the better approach?

Boring is nice

My personal dividend choice between these two stocks is Royal Gold. That's because I prefer companies that pay increasing distributions over time. Royal Gold beats Newmont, and pretty much all other miners, hands-down on this front, with 16 years of annual hikes.  

A Newmont Mining employee working.

Image source: Newmont Mining.

The key here is that Royal Gold isn't a miner, it's a streaming company. That means it pays miners cash up front for the right to buy silver and gold at reduced prices in the future. Miners use the cash to shore up their balance sheets, or spend it on mine expansions and new development. It's a great alternative to selling stock, issuing debt, or going to the bank -- particularly when commodity prices are low.

Royal Gold, meanwhile, benefits from paying low prices for silver and gold, among other metals. For example, Royal Gold pays just $435 an ounce for gold from the Mount Milligan mine, one of its largest investments right now. That's well below the over $1,200 an ounce that gold fetches on the spot market. You can see why Royal Gold likes these deals.  

However, this relationship makes Royal Gold something of a specialty finance company with a portfolio of mine investments. That's another plus in my book, since it can adjust its portfolio by buying and selling streaming and royalty agreements without ever having to own a physical asset. It's a vastly different way to look at the precious metals space, and one that suits my temperament better than a gold miner like Newmont.  

Royal Gold's dividend kept going up despite gold prices falling.

Royal Gold's impressive dividend history compared to the price of gold. Image source: Royal Gold, Inc.

Dividends when you need them

What you won't get from Royal Gold is huge dividend growth. And, if your goal is a mix of diversification and income, you might actually prefer a miner that gives you a big dividend "bonus" when gold prices are high (more on the potential benefit of this below). Newmont Mining is close to a perfect fit in this case.

Newmont's dividend is linked to the price of gold. If the miner's realized price for gold is $1,115 an ounce or less, the company's goal is a $0.10 per share annual dividend. If gold is over $1,600 an ounce, the target is $1.10. Assuming Newmont's realized price is around current spot price levels, the annual dividend is targeted at $0.20 a share. The chart below shows the split points.  

Newmont Mining's gold linked dividend break points.

Newmont Mining's dividend policy. Image source: Newmont Mining.

Newmont upped the dividend payments recently because it has been so successful at cutting costs and trimming debt. It's all-in sustaining costs for pulling an ounce of gold out of the ground fell 22% between 2012 and 2016. Debt, meanwhile, declined 60% between 2013 and 2016. So, the giant miner is rewarding investors for its operational improvements, as well. While I prefer the Royal Gold model, Newmont is clearly focused on returning value to investors, too, just in a slightly different way.  

But here's the big question: How might Newmont's gold linked dividend benefit you? Since the value of hard assets like gold often go up when the rest of the world is crashing, owning Newmont means you could get extra dividend income right when you want it -- or right when you need it, if other companies you own end up cutting their payment during a market or economic downturn. So, not only is owning Newmont a diversification play because it mines gold, seen as a store of wealth, but you can almost think of it as an income insurance policy, too, since its dividend is likely to increase during bad markets.

The downside, of course, is that precious metals can be volatile, and when gold prices go down, Newmont's dividend will be cut. But if the benefit of getting more income when investors are flocking to safe-haven investments sounds like a good idea, then Newmont should be on your precious metals short list.

Regular or irregular

I like my dividends to have a slow and steady upward trend, so Royal Gold wins in my book when I compare it to Newmont Mining. But I can also see why a dividend investor would love Newmont's gold-linked dividend policy. Historically, when gold is doing really well, the rest of the world hasn't been, and that's just when you might like an extra jolt of income. Think of it as insurance against bear market dividend cuts. It's not a bad option, just not right for my temperament. 

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Stocks Mentioned

Newmont Mining Corporation Stock Quote
Newmont Mining Corporation
NEM
$63.17 (-1.03%) $0.66
Royal Gold, Inc. Stock Quote
Royal Gold, Inc.
RGLD
$109.93 (-0.20%) $0.22

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