Royal Gold's (NASDAQ:RGLD) record of 16 straight years of dividend increases makes it one of the top dividend stocks in the gold industry. But when it comes to dividend growth, Agnico Eagle Mines (NYSE:AEM) and Franco-Nevada Corp. (NYSE:FNV) could be even better choices for income investors right now. Here's why.
Agnico Eagle: A strong balance sheet to back dividends
Agnico Eagle is one of the senior gold miners in Canada with a strong global presence. It has eight operating mines in Canada, Finland, and Mexico and a couple of exploration projects in the U.S. and Sweden.
Agnico has paid a dividend every year since 1983, which is a feat for any company operating in the volatile precious-metals industry. But that's not the only good thing about Agnico's dividends. Last year, the gold miner increased its dividends by a whopping 25%. In contrast, Royal Gold raised its dividend by only 4.4% in 2016.
There's a strong chance that Agnico will continue to boost its dividend for two reasons. First, the company paid out just about 37% and 24% of its net profit and free cash flow, respectively, in dividends last year, leaving a lot of room for further increases.
Second, and more importantly, Agnico aims to boost its gold production by nearly 27% by 2021 from its expected 2017 production levels.
As Meliadine and Meadowbank -- the two primary mines that hold the key to Agnico's growth -- are also low-cost mines, a combination of rising production and declining costs should drive Agnico's cash flow higher in coming years, allowing it to pass on bigger chunks to shareholders in the form of dividends. It's worth noting that excluding 2013, Agnico has been free cash flow-positive since 2012.
Long story short, down the road, investors in Agnico can expect fatter dividend paychecks and higher yields than the 0.88% that the stock currently offers.
Franco-Nevada: The best is yet to come
Like Royal Gold, Franco-Nevada is a precious-metals streaming company that buys gold from miners under streaming agreements instead of extracting them, which is why, much like Royal Gold, Franco-Nevada has been able to generate strong margin and cash flow and reward shareholders with 10 consecutive years of dividend increases. But unlike Royal Gold, Franco-Nevada also deals in platinum group metals and oil and gas, which is where its growth potential lies.
While oil and gas royalties currently make up less than 10% of Franco-Nevada's sales, the company believes its oil and gas revenue could grow threefold in the next 10 years. Meanwhile, Franco-Nevada expects its gold equivalent ounces production to grow nearly 14% at the midpoint of 2016 production levels by 2021 as newly acquired streams start adding value. As production expands, so should Franco-Nevada's cash flows and dividends.
In fact, this one chart reveals the tremendous potential in Franco-Nevada's dividend:
If Franco-Nevada's incredible free cash flow conversion record -- as is evident from the gap between its net income and free cash flow -- reflects management's efficiency, the company's small free cash flow payout means there's enough scope for it to raise dividends even if its profit were to grow at a slower pace. Combine that with Franco-Nevada's diversified and growing asset base and the fact that the stock already offers a slightly better yield of 1.3% than Royal Gold's 1.1%, and you have more reasons than one to pick Franco-Nevada over Royal Gold for dividends.
The better choice
Now that you've found two stronger dividend stocks than Royal Gold, you may also want to know which among the two could be a better bet today. I'd put my money on Franco-Nevada simply because the company's streaming business model is far stronger and profitable than Agnico Eagle's, which is also why Franco-Nevada stock has handily outperformed Agnico Eagle in the past decade. I wouldn't be surprised if the stock continues to do.