Royal Gold, Inc. (NASDAQ:RGLD) and Franco-Nevada Corporation (NYSE:FNV) are both precious metals streaming and royalty businesses. That's a different way to play the gold and silver industries. And if you like consistent dividends, both will be in your wheelhouse. But there's an emerging difference between these two roughly similar companies that you need to think about very carefully. Here's what you need to know.

Streaming it in

The first and most important thing to understand about Royal Gold and Franco-Nevada is how they are similar. They are two of the largest royalty and streaming companies. That means they provide cash up front to gold and silver miners in exchange for the right to buy precious metals in the future at reduced rates.

A hand holding a gold nugget

Image source: Getty Images.

To give you an idea of what that means, Royal Gold inked a streaming deal with gold giant Barrick Gold (NYSE:GOLD) in 2015, while precious metals companies were struggling with low commodity prices. Royal Gold paid Barrick $610 million for the right to buy gold and silver from Barrick's 60% interest in the Pueblo Viejo mine in the Dominican Republic. Barrick got cash it needed to solidify its balance sheet, and Royal Gold got the right to buy gold and silver at 30% of their respective spot prices up to certain target levels, and then 60% thereafter. Not a bad deal.  

The streaming model is interesting because it allows Franco-Nevada and Royal Gold to avoid the dirty and dangerous job of mining, but still benefit from being in the precious metals industry. It's also a relatively high margin business, with both Franco-Nevada and Royal Gold claiming margins above 70%. Royal Gold has a slight edge, here, by a few percentage points.  

Those high margins, coupled with relatively conservative operating philosophies, has allowed both companies to increase their dividends annually despite weak gold prices. Franco-Nevada's annual streak is up to 10 years, and Royal Gold's is up to 16 years. The yields this pair offers aren't huge, at roughly 1.2% each, but the consistency of the dividend increases in the precious metals space is unique.

The streaming business model explained by Royal Gold.

Royal Gold's business, broken down. Image source: Royal Gold, Inc.

In the end, Royal Gold and Franco-Nevada are almost interchangeable...if it weren't for the growing oil and natural gas business at Franco-Nevada.

Oil and gold?

Royal Gold's business is almost entirely focused on gold and silver, though it does have a little exposure to industrial metals, notably copper. Franco-Nevada is heavily weighted to gold, with silver and other metals filling out most of the top line. But Franco-Nevada also got roughly 6% of its revenues in the first quarter from oil and natural gas assets.  

That sounds small, but Franco-Nevada has been spending money in the space to grow that exposure of late. For example, revenues from this business roughly tripled year over year in the first quarter. And, according to the company's earnings release, "The contribution from the new U.S. royalty assets is expected to become more significant after 2017." Management was speaking specifically about oil there, and thus, this could be an increasingly important differentiation between Royal Gold and Franco-Nevada.   

Franco-Nevada is mostly in gold, but oil is growing.

Franco-Nevada's oil business is expected to grow from here. Image source: Franco-Nevada Corporation

Why would a precious metals focused company want to have exposure to oil and gas? The answer is diversification. Both precious metals and energy prices are subject to volatile price swings, but often at different times. And right now, oil prices are trending at a relatively low level, potentially making it an opportunistic time for Franco-Nevada to build up a position. And like its precious metals business, it doesn't run the oil wells. So, this isn't a huge departure from its gold and silver steaming business.

What do you want?

At this point, when you compare Royal Gold and Franco-Nevada, you need to be asking yourself if you want a pure play or a more diversified business. If the answer is pure play, then Royal Gold's focus on metals is the better option for you. However, if you like the fact that oil adds a little more diversity to Franco-Nevada's revenue stream, then you should avoid the pure play and go with Franco-Nevada and its push into the oil and natural gas space.