Tags: Gold | Stocks | Dividends | metal

With Gold Stocks Down, Dividends Are Up. Get Paid to Wait!

Sunday, 05 Aug 2012 05:25 PM

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The price of gold soared in recent months and then put in a long, slow correction lower. The metal is still higher than it has been in years, but gold investors are right to be feeling a bit woozy from the ride.

Gold-mining stocks fared even worse. Many investors bought into miners, hoping that a rise in the price of the commodity would mean great things for the companies that produce it. That’s often correct, but a look at the performance of one major mining exchange-traded fund (ETF), the Market Vectors ETF Trust (GDX) tells a different story.

While the straight metal fund SPDR Gold Trust (GLD) put on a 133 percent gain over the past five years, the mining ETF has gained just under 9 percent. It’s ahead of the Dow Jones Industrial Average over five years, but the gap between the mining stocks and the metals stocks is considerable.

What’s less appreciated is that funds hold stocks and stocks pay dividends. If you were disposed to allocate capital toward gold or gold stocks at this point in time, you would be in a position to buy gold stocks while they are comparatively cheap compared with the metal, in terms of recent gains, and you would be taking advantage of higher yields.

That’s because as the price of a stock falls, its yield rises, presuming the dividend remains the same. For instance, the top holding of GDX, at nearly 16 percent of the fund, is Barrick Gold (ABX.TO). It pays a yield of 2.44 percent.

The next-largest holding at nearly 13 percent is Goldcorp (GG.TO), paying a yield of 1.5 percent. Third in line is Newmont Mining (NEM), at a 3.13 percent yield. AngloGold Ashanti (AU), another top holding of the fund, yields 1.3 percent.

Bear in mind, GDX is the large-cap ETF. These are far from speculative stocks. These mines are among the biggest and best-financed mining companies on earth. It’s always important, however, to closely research individual stock holdings you might purchase, since each has its own management and faces its own risks.

Investors also sometimes confuse GDX with GDXJ, the Market Vectors Junior Gold Miners ETF. While useful in its own way, the junior fund is packed with much smaller, and thus much riskier, investments. Its top holding, B2gold (BTO.TO) pays no dividend at all, for instance.

In addition, the dividend yield of the GDX fund itself is no great shakes: 0.35 percent.

However, the decline in gold mining share prices offers individual investors an interesting opportunity: Buy gold stocks while they have declined in price and get paid to wait for the recovery.

If owning individual mining shares fits your asset allocation, your chance could be at hand to buy low and sell high, with the added protection of dividend income while you wait.

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