Gold has long been viewed as a safe store of wealth in hard times. While that might be true, buying gold directly is kind of like stuffing dollar bills in your mattress. If investing in the yellow metal interests you, you should look at Newmont Mining (NYSE:NEM) because the company is structured to pass along the benefits of rising gold prices to its shareholders.
Gold coins are pretty
There's no question that a shiny gold coin is a pretty thing to behold. But if you buy one, that's about all you get. Sure, the price of the coin will go up and down with the value of gold, but you'd have to sell it to benefit from price increases. You're more likely to just put the gold in a safe or safety deposit box and forget you even have it as you await the collapse of the modern financial world.
The real question here is are you a numismatist (coin collector) or an investor? If the answer is coin collector, great -- buy all the gold coins you can and lock them away for safekeeping. If, on the other hand, you're an investor, then you need to think about what you want to achieve from investing in gold coins.
If you are waiting for the zombie apocalypse... buy bullets, not gold coins. If the idea is to benefit from a rise in the price of gold, gold coins work, but not well. What if there was a different way? Newmont Mining could be just the answer thanks to a unique dividend policy that lets shareholders benefit from rising gold prices without the need to sell any shares.
Tied to gold
In 2011, Newmont Mining became the first miner to tie its dividend payments to the price of gold. The model is pretty simple: If gold is priced below $1,200 an ounce there's no obligation for the company to pay a dividend (it might decide to, however). When gold is between $1,200 and $1,299 the dividend is $0.10 a share annually. Between $1,300 and $1,399 that doubles to $0.20 a share. Then it goes up in $0.20 annual increments for every $100 price increase in gold until it reaches $2 a share annually when gold goes over $2,200 an ounce.
Now, if you owned a gold coin and gold went from $1,200 an ounce to $2,200 an ounce, you'd be pretty happy. But that increase is all paper profit -- that gold coin wouldn't put anything in your pocket. In fact, if you saw that kind of gold advance, would you actually have the willpower to lock in the gain by selling it? I know I probably wouldn't.
For $1,200, however, you could buy 50 shares of Newmont Mining today. So, at $2,200 an ounce, you'd get a $100 dividend. That's not that much, right? Well, based on a $1,200 investment that is about an 8% dividend yield. And it's more than likely that Newmont's shares would be heading higher at the same time, since its main asset is gold in the ground and the value of that gold just increased by 80%.
In other words, you get cash in hand from the dividend to let you participate directly in the gold advance. You also benefit from any increase in Newmont's share price. Although I can't promise Newmont's shares will rise if gold appreciates in value, history suggests it's a likely outcome. That would mean you collect capital gains and dividends. I don't know of any gold coins that offer that combination.
Investor, collector, or hoarder
There are good reasons to want gold or silver around, just in case the world does end. But if that's why you own gold, you aren't investing --you're hoarding. If you buy gold coins and lock them away, are you collecting or investing? Unless you have a plan to sell them, you're collecting. If you really want to invest in gold, Newmont Mining could be the better play. First, your investment will pay you dividends as gold's value goes up; second, the shares are likely to appreciate along the way.
Reuben Brewer has no position in any stocks mentioned, but does have a few silver coins with pretty pictures of boats on them. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.