Please ensure Javascript is enabled for purposes of website accessibility

Why Wheaton's Unique Dividend May Be Just Right for Your Portfolio

By Reuben Gregg Brewer – May 31, 2019 at 8:44AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

If you're looking for exposure to precious metals to protect your portfolio's downside, Wheaton's dividend could give it the edge over peers.

Precious metals like gold and silver are viewed as safe-haven investments. They are the types of hard assets to which investors tend to flock when the stock market is falling. If you are looking at the S&P 500 Index's still-lofty levels and increasing volatility, and thinking adding some diversification with precious metals sounds good, then gold and silver streamer Wheaton Precious Metals (NYSE: WPM) and its unique dividend policy might be just right for your portfolio.

The basics of the business

Wheaton is a streaming and royalty company. That means that it provides cash up front to miners in exchange for the right to buy gold and silver in the future at contractually locked-in low prices. Miners use the cash to invest in their businesses (building new mines, expanding existing assets, or to strengthen the balance sheet). Wheaton, meanwhile, gets access to low-priced precious metals without the need to do any of the hard mining work.

A woman wrapping her arms around stacks of gold bars

Image source: Getty Images

To put some numbers on that, in 2018 Wheaton's average cash cost for gold was around $410 per ounce. For silver it paid about $4.70 per ounce. Although both commodities bounced around a great deal in 2018, gold ended the year at around $1,300 per ounce and silver finished at about $15.50 an ounce. It doesn't take much work to figure out that Wheaton benefits greatly from this arrangement. The benefit for miners is that they get access to cash that doesn't require dealing with a bank, selling bonds, or issuing dilutive shares of stock, options that can be quite expensive at times. It really is a win-win scenario.   

That said, Wheaton is hardly unique in the streaming business. It has plenty of competitors, like fellow industry giants Royal Gold (RGLD 0.35%) and Franco-Nevada (FNV 0.03%). All these companies will likely be beneficiaries from a flight to safety in the stock market. For example, on May 13, 2019, when the S&P 500 fell 2.5% in a single day, each of these streamers rose. Royal Gold was up 1.5%, Wheaton gained 2.3%, and Franco-Nevada was up 3.6%. But there's something that Wheaton does that's vastly different from its two closest peers -- and for the right investor, it may make the difference when trying to pick a safe-haven investment.

The odd man out, but maybe in a good way

Royal Gold and Franco-Nevada both focus on providing investors with a consistent dividend, one that slowly rises over time. Royal Gold's streak of annual increases is an impressive 18 years and counting. Franco-Nevada's run is up to 11 years. Since gold and silver are known for swift and dramatic price swings, these are impressive accomplishments. For income investors seeking consistency, Royal Gold and Franco-Nevada are precious metals options that should be examined carefully. 

These streaming companies bucked the trend on a bad day for the marketSPY Chart

SPY data by YCharts

Wheaton does things in a totally different manner. Its dividend is pegged at 30% of the cash generated by operating activities over the trailing four quarters. Since the volatile prices of gold and silver are important determinants of the company's financial success, its dividend will tend to go up and down with the commodities in which it invests. To put it simply, its dividend is variable. If you are looking for income consistency, Wheaton would be a terrible choice. 

But don't write off Wheaton just yet. If the goal of adding precious metals to your portfolio is to protect yourself from the ups and downs in the market, then you need to think more deeply about Wheaton's unique dividend policy. The stock is likely to be seen as a safe haven, which means that it will probably be heading higher when other stocks are falling. That's a net benefit, but one that you'll get with an investment in Royal Gold and Franco-Nevada.

Wheaton charts its own dividend courseWPM Dividend Per Share (Annual) Chart

WPM dividend per share (annual) data by YCharts

What Wheaton adds is that gold and silver prices will probably be rising at the same time, boosting its financial results. And that, in turn, will lead to higher dividends. So your income stream could be rising when the rest of your portfolio is under downward pressure -- the type of headwind that could lead other investments to stop increasing dividends or, worse, result in dividend cuts. That means you could see increasing income from Wheaton right when you most need a little good news. That would give you something positive to focus on when it feels like the rest of your investing world is falling apart.

Sleeping well is a good thing

Wheaton's yield is roughly 1.6% today, but that's not huge by any measure (though it is higher than the 1.2% and 1.3% offered by Royal Gold and Franco Nevada, respectively). However, the benefit of adding this stock to your portfolio is about diversification. You could get similar diversification from Royal Gold and Franco-Nevada, but it's Wheaton's unique dividend policy that really sets it apart.

As Wheaton benefits from rising precious metals prices, which will often happen when investors are shifting to safe haven assets in market downturns, shareholders will benefit from a rising stock price and very likely a rising dividend at the same time. It's a subtle detail, but investing is an emotional endeavor, and Wheaton's approach could help you sleep well at night by giving you a double dose of positive news to latch onto instead of ruminating about the dismal results in the rest of your portfolio.

Reuben Gregg Brewer owns shares of Franco-Nevada. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Stocks Mentioned

Royal Gold Stock Quote
Royal Gold
$111.99 (0.35%) $0.39
Franco-Nevada Stock Quote
$194.95 (0.03%) $0.05

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.