Precious metals and dividends aren't usually concepts that go well together because of the inherently volatile nature of the silver and gold mining industries. However, the gold- and silver-streaming slice of the sector works a little differently, which is why Royal Gold, Inc. (NASDAQ: RGLD) has a record of increasing its dividend that is unique in the precious metals space. But that doesn't mean it's the best option for all investors. That's why you should take a closer look at streaming competitor Silver Wheaton (NYSE: SLW) and its variable dividend policy.
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Consistency is the name of the game with dividends
To get my preference out of the way up front,I think Royal Gold is the better option here. That's because the company has increased its dividend every single year for 16 consecutive years. That's a pretty impressive record for any company, let alone one in which the main products are commodities subject to often-volatile price swings.
Image source: Silver Wheaton.
Royal Gold has been able to do this because it isn't technically a miner --it's a streaming and royalty company. Basically, it pays miners cash upfront for the right to buy silver and gold at reduced prices in the future. To give you an idea of what that can look like, Royal Gold pays just $435 an ounce for gold from the Mount Milligan mine, one of its largest investments. The spot price for gold is over $1,200 an ounce right now, so you can see how desirable deals like this are for Royal Gold.
Miners, however, also like these deals since they get a lump sum of cash right when they need it. They can use that cash to strengthen their balance sheets or spend it on mine expansions and new development. Dealing with a streaming company is a valuable alternative to selling stock, issuing debt, or going to a bank when those options are expensive. It's also a quick way to monetize an asset, instead of having to wait for the gold and silver to be mined.
Royal Gold's impressive dividend history compared to the price of gold. Image source: Royal Gold, Inc.
And since miners are usually most desperate during downturns, Royal Gold can actually grow its business when gold and silver prices are depressed. For example, the company's production increased 13% in fiscal 2015 and a massive 36% in fiscal 2016 because of new streaming deals. That counter-cyclical dynamic is a key reason why the company was able to keep upping the dividend right through the precious metals downturn.
The same, but different
Silver Wheaton follows the same basic business model. It pays roughly $4 an ounce for silver and $400 an ounce for gold -- well below what each of those metals fetch on the spot market today. It used the downturn to ink deals with financially strapped miners, too, including industry giants like Vale SAand Glencore. Deals like these led to production growth of around 15% in 2016 after a huge 35% jump in 2015, when the gold and silver sector was really getting hit.
Silver Wheaton's unique business model in two pictures. Image source: Silver Wheaton Corp.
But Silver Wheaton's dividend hasn't grown steadily like Royal Gold's dividend. It goes up and down with the prices of silver and gold because the company's policy is to pay out 20% of the average cash generated by operating activities over the trailing-12-month period. Royal Gold's policy is clearly to pay a stable and growing distribution.
I like stability, so I prefer Royal Gold's policy. However, Silver Wheaton might be a better option for investors looking for diversification. That's because precious metals are seen as a store of wealth and tend to perform best when the financial outlook for the broader market is darkest. So, Silver Wheaton's dividend is likely to be rising right when investors may need a boost of cash to offset poor portfolio performance or, worse, dividend cuts at other companies. Note that the dividend was increased 20% at the end of last year and another 15% at the start of 2017 -- a time period in which some market pundits were warning of extreme overvaluation in the market.
The dividend choice is yours
As I stated upfront, I prefer slow, steady, and boring. So Royal Gold is just my speed, providing regular annual dividend hikes over the past three years averaging around 5%. Silver Wheaton, meanwhile, offers a different approach that may suit your needs better. Essentially, it gives income investors a little dividend diversification since Silver Wheaton's dividend is likely to increase just when other companies are feeling the pinch of economic distress. That's not a bad option, so long as you understand what you're getting into before you buy.
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