Investing in precious metals isn't normally associated with dividends. The price swings in the gold and silver space are so volatile that miners often go from gushing cash to bleeding red ink, and then back again. That cycle makes it hard to support a steady dividend. But a few years ago, miner Newmont Mining Corp (NEM 1.18%) came up with a dividend policy that provided some clarity and consistency to the space. However, precious metals streamer Wheaton Precious Metals Corp (NYSE: WPM) is an even better option for investors looking to get some dividend income out of a gold and silver investment.
The basic model
The goal of both Newmont and Wheaton is to reward investors when times are flush. In Newmont's case that is achieved by tying the dividend to the price of its main commodity, gold. When gold prices go up the miner's dividend goes up, too. When gold prices fall, the dividend falls along with it.
Image source: Getty Images
Most other miners attempt to pick a dividend that the board and management believe is sustainable over time. There's no clarity for investors, however, because the process is opaque. You get what the board says you get with little explanation. And the volatile nature of the industry often leads to dividend cuts, again with little warning or explanation. For example, Barrick Gold (GOLD 1.33%) cut its dividend in mid-2013 and again in mid-2015 before starting to increase it in 2017.
The driving force, of course, is commodity prices. Barrick was cutting when gold prices were falling and started increasing again after gold began moving higher. That is why Newmont's approach is so interesting. It gives investors a clear picture of what to expect in good times and bad. There's no guessing game as to what the board will or won't do.
Wheaton's way of rewarding investors is different, but similar. It's dividend is set at 30% of the cash generated by operating activities over the trailing-12-month period. (The rate was adjusted higher from 20% in late 2017.) Although this isn't directly tied to the price of gold and silver, it is directly impacted by commodity prices. Like Newmont, Wheaton's investors can expect, with some clarity, higher dividends when commodity prices are high and lower dividends when silver and gold prices are weak.
Not in the same business
However, there's a big difference in the way Newmont and Wheaton approach the precious metals space. Newmont is a miner, which means it has to find gold, build a mine, dig up and sell the gold, and then shut the mine down when all the economic gold has been extracted. It's a risky and expensive business model, even though there's nothing particularly unique about the way Nemont operates in the mining world. (Barrick does, essentially, the same things.)
A quick overview of how streaming works. Image source: Wheaton Precious Metals.
Wheaton, on the other hand, is a streaming company. That means it provides miners cash up front for the right to buy silver and gold at reduced rates in the future. It currently pays around $4 an ounce for silver and $400 an ounce for gold. These prices are contractually locked in, which allows Wheaton to achieve robust margins in good times and bad times because its costs are always low. Newmont has to cut costs, a time consuming and difficult task, to adjust to falling gold prices.
WPM EBITDA Margin (TTM) data by YCharts
The results of these two approaches are notable when comparing EBITDA margins. Over the past decade, Wheaton's EBITDA margin remained positive despite a deep decline in the price of gold and silver that started in 2011. Newmont's margins, however, fell well into negative territory as commodity prices slipped. Wheaton's business model is simply more robust because of its contractually locked-in low prices.
Clarity is good, but you can get more
Both Newmont and Wheaton will fit the bill if someone is looking for a gold- and silver-linked investment that rewards investors with rising dividends when commodity prices are heading higher. The caveat being that they'll feel the pinch of dividend cuts when commodity prices fall. The factor here is that both companies provide clarity as to what can be expect, unlike most other commodity companies where the dividend policy is draped in secrecy as it's discussed in private at the company's board meetings.
However, Wheaton is a better dividend stock because its streaming business model is more robust through the commodity cycle. The down markets don't sting quite as much because of its locked-in low costs for silver and gold. That won't change the ups and downs in Wheaton's dividend, but it will help investors sleep better at night as they wait to receive their quarterly checks.
