Dividend stocks are everywhere, but many just downright stink. In some cases, the business model is in serious jeopardy, or the dividend itself isn't sustainable. In others, the dividend is so low it's not even worth the paper your dividend check is printed on. A solid dividend strikes the right balance of growth, value, and sustainability.
Today, and one day each week for the rest of the year, we're going to look at one dividend-paying company that you can put in your portfolio for the long term without too much concern. This isn't to say these stocks don't share the same macro risks that other companies have, but they are a step above your common grade of dividend stock. For reference, here is last week's selection.
This week, I want to show you how a company relatively new to paying dividends can be just as important to growing your income stream as one that's paid a dividend for 20 or more years. Let's take a closer look at why Silver Wheaton
A more than marginal advantage
Mining companies are probably one of the last sectors you'd think of when it comes to dividends and value, but Silver Wheaton will give you a hefty dose of both. With good reason, Foolish metals guru Christopher Barker refers to Silver Wheaton as the most profitable company in the world. That's because Silver Wheaton isn't a miner in the traditional sense. It enters into long-term contracts with silver miners, agrees to purchase the silver at a discounted rate, and then pockets the difference. Nearly all of Silver Wheaton's contracts have the company paying between $4 and $5 per ounce, which allowed it to crank out gross margin in excess of 80% last year.
Aside from silver salability to investors and some traders' uses of the metal as a hedge against a weak dollar, silver also has more practical uses than gold. Silver is an essential component in many of today's popular electronic products, but is also a crucial element in jewelry, superconductivity, and water purification.
Crushing the competition
Silver Wheaton has almost double what its closest peers have in proven and probable reserves, with 798 million ounces. Basing this completely on yesterday's closing prices, including the 220,000 ounces of gold it has as well, Silver Wheaton is sitting on $25.4 billion worth of proven and probable reserves. Assuming its margins remain around 80%, Silver Wheaton could produce around $20 billion dollars in profit.
While the majority of the silver sector looks attractive, Silver Wheaton is simply so far ahead of everyone else that it's not even fair:
|
Company |
Gross Margin |
Proven + Probable Reserves |
|---|---|---|
| Silver Wheaton | 80.3% | 798 million ounces silver/ 0.2 million ounces gold |
|
Pan American Silver |
47.8% | 235.3 million ounces silver/ 0.6 million ounces gold |
|
Endeavour Resources |
52% | 16.8 million ounces silver/ 0.1 million ounces gold |
|
Coeur D'Alene |
36.9% | 216.3 million ounces silver/ 2.3 million ounces gold |
Sources: Morningstar, individual press releases. Gross margin based on most recent annual report.
As I mentioned, Silver Wheaton's reserves far and away dwarf its peers. Its gross margin of 80% is more than double Coeur D'Alene. Endeavour, another favorite of the Fool's Christopher Barker, has considerably more reserves that are inferred than the 16.8 million ounces mentioned, but for the sake of proven and probable reserves, Silver Wheaton has 47 times as much silver. Even Pan American Silver, which is no small mining operation, would need to mine considerably more tonnage just to match Silver Wheaton's insane margins.
It's these margins that allowed Silver Wheaton to tie its dividend to its operating cash flow last year and triple its previous quarterly stipend from $0.03 to $0.09. With the company's costs being fairly predictable, Silver Wheaton's dividend should continue to move significantly higher. At 1.1%, the yield may not seem all that impressive, but considering that it has what I estimate to be $20 billion in operating income headed its way, shareholders are almost assured to share a larger chunk of that pie.
Foolish roundup
As I said earlier, great dividend stocks don't always need to fit a specific mold. They come in all shapes and forms, and Silver Wheaton is well on its way to becoming a fantastic income producer for years to come.
If you're craving even more dividend ideas, I invite you to download a copy of our latest special report, "9 Rock-Solid Dividend Stocks," which is loaded with income-producing companies hand-selected by our top analysts. Best of all, this report is free, so don't miss out!
- Add Silver Wheaton to My Watchlist.
