Of the many recurring myths propagated by those who prefer to disparage gold over sharing in the profit from its continuing multiyear advance -- the claim that gold does not pay dividends -- is among the simplest myths to dispel.
By thinking of gold solely as a metal bar (reportedly) sitting in a vault somewhere, many of gold's detractors fail to consider the enormous profit potential of the companies that mine the metal. Worse still, any bullish commentary on gold's price moves by precious-metal researchers like myself are routinely misinterpreted as clarion calls for investors to eschew stocks of all kinds and convert all of their capital to bullion. While I do consider some bullion exposure prudent, allocation is always a matter of personal preference. Indeed, my own precious-metals investment strategy is focused intently upon stocks in the mining sector.
As increasing margins spill over into company coffers in the form of robust cash flow -- which is just now beginning to take shape convincingly here in the tenth year of this secular bull market for gold -- I contend that investors will enjoy a strong trend of increasing dividend yields that will finally lay this unwarranted criticism to rest. If you have forsaken gold as an investment asset because you are more of an income investor, I encourage you to keep a very close eye on the mining sector going forward.
Meet tomorrow's dividend leaders
Fresh from a massive growth spurt that added five new producing gold mines in just three short years, Agnico-Eagle Mines (NYSE: AEM) last week reiterated its forecast to double gold production in 2010 to as much as 1.1 million ounces. Although the Kittila operation in Finland continues to encounter some challenges that have slowed its ramp-up process considerably, Agnico now enjoys the luxury of being able to scale back capital expenditures considerably just as gold prices are expanding the industry's margins.
During the earnings conference call, CEO Sean Boyd expressed the miner's intention to "increase our returns to shareholders through an improvement in our dividend payout." Agnico shares presently yield only about 0.3%, but I consider such a modest payout entirely appropriate for the aggressive growth spurt that the company is now completing.
Granted, none of the gold miners are paying yields at this juncture that would, by themselves, beckon the interest of an income-junkie. Leading producers Barrick Gold (NYSE: ABX), Newmont Mining (NYSE: NEM), and Goldcorp (NYSE: GG) each carry annualized yields beneath 1%. Peruvian miner Buenaventura (NYSE: BVN) is a relative standout with a current yield of only 1.8%. Looking to silver, we find my top pick Silver Wheaton (NYSE: SLW) pondering the issuance of dividends now that silver prices have moved some $13 above the company's essentially fixed all-in costs for silver.
However, cash flows for the industry have only recently turned remarkably positive; after the earlier stages of the bull market for gold corresponded with momentous increases in mining costs. Caesar Bryan, who manages the Gamco Gold Fund, expects "significant" dividends to emerge from those producers with strong cash flow and extensive treasure in reserves. Positioning his fund for the anticipated trend, he has singled-out Agnico-Eagle Mines, Kinross Gold (NYSE: KGC), and the big-three mentioned above.
Will history repeat?
The historical record from Homestake Mining -- the Depression-era's equivalent to today's gold-mining titans -- exhibits strong precedent for substantial increases in mining dividend yields in a rising price environment. If history is any guide, and in this case I believe it is, the coming stages of this precious metals bull market will be marked by a noteworthy ramp-up of dividend rewards to the patient lot of investors in the mining sector.
So if you have ignored gold because it pays no dividends, I am here to tell you that it can.
