The Great Dividend Gold Rush

12/12/2011 11:04 am EST

Focus: STOCKS

Gold miners, which have been mostly left out of gold's jump this year, plan to attract investors with a steady stream of income, writes Shirley Won of The Globe and Mail.

In the battle to attract investors, gold miners are wielding a new weapon: dividends.

On Monday, Goldcorp (GG) announced a dividend increase—its third in the last 13 months. Its decision follows similar moves this fall by Barrick Gold (ABX), Yamana Gold (AUY), and Alamos Gold (Toronto: AGI).

Meanwhile, Newmont Mining (NEM), Eldorado Gold (EGO), and silver producer Hecla Mining (HL) have vowed to link their dividends to rising prices for precious metals.

For gold producers, which have historically paid no or low dividends, this emphasis on generating a steady steam of income for their shareholders is unprecedented.

Observers say it reflects the need for gold companies to compete for investors' attention against bullion-backed exchange traded funds. Gold ETFs don't pay dividends, but they do offer a no-fuss way to bet on precious metal prices without having to worry about the management and exploration issues that go along with investing in a gold miner.

Paying dividends is a way for gold producers to lure back investors who have defected to ETFs. But shares in precious-metals miners are still fundamentally a bet on commodity prices, not dividend increases, analysts say.

"The overriding attraction for gold companies is [if you] believe that gold is going higher," says Paul Burchell, an analyst at Dundee Securities.

"The dividends for most of the companies are still fairly low—in the 1% to 1.5% range. There are still other sectors where one could probably get better yield."

Josh Peters, an equity income strategist at Morningstar, says yield-hungry investors should avoid the mining sector because there is still uncertainty about whether gold producers can sustain the dividends through the ups and downs of a commodity cycle. The concept of miners paying regular dividends through thick and thin is still relatively new, he said.

Utilities, REITs, pipelines, and packaged-food companies are better places for yield because of their "steady business models and no wild swings in demand," said the editor of the Morningstar DividendInvestor newsletter.

Some dividend funds own gold stocks: Goldcorp, for instance, is among the top ten stocks in BMO Dividend and Scotia Canadian Dividend funds, while Barrick is in IA Clarington Canadian Dividend Fund.

That doesn't mean investors should mimic these funds, though. Money managers will sometimes buy gold shares as a source of liquidity or as a way to diversify their holdings.

"I am not holding my breath" for gold companies to be big dividend growers, said Gilbert Lamothe, who runs IA Clarington Canadian Dividend. "When they are profitable, they look for other ways to deploy their capital, such as making investments in gold or other miners. Barrick Gold bought a copper producer this year."

Gold bulls say dividend increases are less important in themselves than as a way to reignite interest in mining stocks.

"In the past, when we saw gold move 10%, the producers' share prices would move on average by 12% to 15%," Burchell said. "In the last couple of years, we have seen that leverage basically disappear. In fact, bullion has outperformed the underlying equities...Bringing up the dividends will hopefully help them narrow, or reverse that gap."

Dividends paid by 13 of the world's largest gold miners should rise to over $2.3 billion this year, from $1.4 billion last year and $600 million in 2005, according to Minefund.com, a Web site devoted to natural resource analysis.

"But it could be $2.5 billion by year-end, because I am expecting several companies to announce some kind of bonus dividend," said its publisher, Timothy Wood.

While miners have lower yields than traditional sources like banks, utilities, or telecom companies, it's still "an excellent time for people to dive in" for diversification reasons, said Wood, also executive director of Denver Gold Group, a US-based precious metals investment advocacy group.

Related Articles on STOCKS

Keyword Image
Seasonal Trading in Oil
12/13/2017 5:00 am EST

Oil companies typically come into favor in mid-December and remain so until late April or early May ...