Franco-Nevada Corp (NYSE:FNV) and Wheaton Precious Metals (NYSE:WPM) each provides investors exposure to precious metals in a unique way. But one of the main reasons to add gold and silver to your portfolio is diversification -- and on that score, one of these precious metals streaming companies has a clear edge. Here's a strong case for buying Franco-Nevada Corp over Wheaton Precious Metals.

The streaming model

Both Franco-Nevada and Wheaton are streaming companies, which means they provide miners cash up front for the right to buy gold and silver in the future at reduced rates. By inking these types of deals, streaming companies avoid the risks, costs, and complexity of running mines and, of course, they lock in low prices. For example, Wheaton's average cost for gold is roughly $400 an ounce, and for silver, it's around $4 an ounce (both well below current spot prices).

A man holding a gold ingot

Image source: Getty Images

So at their core, Franco-Nevada and Wheaton are roughly similar companies. But you should probably think of them as specialty finance companies with a portfolio of precious metals investments. They are both decent ways to get exposure to gold and silver, but Franco-Nevada has some unique differences that I think make it a better option for most investors than Wheaton.

Dividends and diversification

The first big difference is the way in which they reward investors with dividend payments. Wheaton has taken the approach of paying out more when its business is performing well (basically when commodity prices are high) and less when things aren't going well. That means that its dividend will go up and down over time and shift largely with gold and silver prices.

That's not inherently a bad thing, but it can make it hard to stick out a commodity downturn. Franco-Nevada, on the other hand, has chosen to increase its dividend regularly over time. Including 2017, it has increased its dividend for 10 consecutive years. That will make it much easier to hold onto the stock when gold and silver prices are weak -- you'll be able to look to the yield and dividend hikes as a reason to maintain your position and get the full diversification benefit of owning precious metals.

A map of Wheaton's investments

Wheaton's portfolio of investments. Image source: Wheaton Precious Metals

That said, there's more to the diversification argument here. Wheaton's portfolio is exclusively focused around silver (around 55% of projected production) and gold (45%). If you are looking for exposure to just these precious metals that's a good thing. But it also means there are no offsets to the volatility inherent in the silver and gold markets. I prefer to hedge my bets just a little bit, which is the big reason I prefer Franco-Nevada over Wheaton.

Franco-Nevada's portfolio is a bit more diversified, with gold making up around 70% of revenues, silver roughly 15%, other metals about 9%, and oil and gas 6%. While I like that around 10% of revenue comes from other metals, the one thing on that list that should really stand out is oil and gas.

Franco-Nevada has used the energy downturn to opportunistically invest in oil and gas assets. It's using the same basic approach of investing in, not owning and operating, energy assets, so it's sticking close to its knitting. This investment, which is expected to grow over the next year or two, increases Franco-Nevada's portfolio diversification. It will likely never be as large as the company's gold and silver businesses, but I believe it will add materially to the top line's stability over time... and the company's ability to sustain its dividend growth.

A map of Franco-Nevada's investments

A map of Franco-Nevada's investments, featuring a lot more dots than you'll find on Wheaton's map. Image source: Franco-Nevada Corp

There's another diversification issue to look at here, too. Wheaton has made the decision to focus in on a small number of large projects. It has investments in 20 operating mines and eight development projects. That's more diversification than you'd get by owning most miners, but not nearly as much as you'll get from an investment in Franco-Nevada. Franco has investments in 47 producing mines, 40 mines in an advanced stage of development, 173 exploration stage mines, 61 producing oil and gas projects, and 19 oil and gas investments in the exploration stage. Franco has clearly spread its eggs over a lot more baskets.

Decisions, decisions...

To be fair, Silver Wheaton is a well-run company and a perfectly fine way to get exposure to precious metals. But you have to understand that it basically only invests in silver and gold, has a focused portfolio, and that dividends will vary over time. I think Franco-Nevada is a better option for most investors because regular dividend hikes will keep you invested when times are tough, and it's more diversified. That includes both a broader portfolio of mine investments and the inclusion of other commodities, like oil and gas, to help offset the inherent volatility of silver and gold.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.