Dividend Growth Investors: Look To Precious Metals. 3 Companies To Watch

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Includes: ABX, IAG, WPM
by: Bayesian Investing

One of the biggest investment stories of this decade has been the massive bull market in precious metals.

The future of this decade-long bull market has been a much speculated upon topic on Seeking Alpha. The biggest question, of course, is: will it continue? Whenever I have a question about the market I take a big step back and look at the longer time-frame.

As we all know, the stock market has both a bull and a bear cycle and commodities have a corresponding counter-cycle. Through the last century there have been long periods where stock prices stagnated but commodities soared. The cycle then reverses itself with large stock gains and real declining commodity prices. The average cycle length has been about 18 years.

When looked through this simple, historical model what has happened with the markets this decade is neither new nor particularly scary. More to the point: based on the historical length of these cycles, fundamental and technical reasons, the data strongly points to the commodity and precious metal bull continuing for several years.

Precious metals and dividends are rarely mentioned in the same sentence but I believe dividend growth investors should look to precious metal equities. These stocks offer some important portfolio diversification, inflation protection and tremendous growth opportunities. The yield may be low now, but for those patient investors with long investments timeframes, mining stocks can use all that mountain of cash they are generating from high precious metal prices to produce impressive yields on cost.

Below are a few of my favorites:

Silver Wheaton (SLW)

Silver Wheaton is a silver streaming company that, in return for up front funding for silver mines, receives a portion of that mine’s silver at a low, fixed cost. This ingenious business model guarantees huge profits without any of the associated risks of actually engaging in mining. It also makes Silver Wheaton the perfect inflation play: if inflation drives the price of silver up the company will get all the benefit without having to pay the increased labor and energy costs usually associated with inflation. The stock price has skyrocketed well over 20,000% this decade and future EPS is still projected to grow at over 30% next year. The company is projecting an amazing 80% increased in silver production by 2015.

While I believe Silver Wheaton is the safest stock on this list, it is also the most speculative from a dividend growth perspective. This year the company announced a tiny inaugural dividend and has been clear about their intention to grow this dividend over time. They certainly have the cash to fund a much, much higher dividend but it is yet to be seen how quickly or slowly these increases will take place.

SLW Key Metrics

Dividend Yield

.33%

1 year Dividend Growth Rate

N/A

5 year Dividend Growth Rate

N/A

Dividend Payout Ratio

8.6%

Return on Equity

19%

5 year Total Return

24.6%

Analyst Recommendation

STRONG BUY

IAMGOLD Corp (NYSE:IAG)

IAMGOLD Corp is primarily a gold mining company but they also have interests in silver, zinc and rare earth metals. They have eight producing gold mines spread over three continents (Africa, Canada and South America) and five mines in the development stage. IAG is currently producing almost 1,000,000 ounces of gold per year and has steadily increased their gold reserves from 12.4 million oz in 2008 to 16.4 oz in 2010. IAMGOLD has paid a steady annual dividend since 2003 and announced in 2009 their intention to start increasing their dividend. Two years of dividend growth is not much of a history but the two hikes were each for an impressive 20% and they have more than enough cash coming in for further sizable increases.

IAG Key Metrics

Dividend Yield

.87%

1 year Dividend Growth Rate

20%

5 year Dividend Growth Rate

N/A

Dividend Payout Ratio

5.7%

Return on Equity

26%

5 year Total Return

19.5%

Analyst Recommendation

STRONG BUY

Barrick Gold Corp (NYSE:ABX)

Barrick Gold is a major gold miner with a large portfolio of gold producing mines across the world. This $53 billion market cap company has paid dividends for over two decades. Barrick has also been increasing their dividend for over twenty years and while the dividend growth has been uneven it is nonetheless very impressive. In 2001 Barrick paid $0.11 per share in dividends; by 2010 that amount had increased to $.044. With advance development mines brining new gold production online yearly and a very low payout ratio, Barrick can easily afford to keep up their frantic pace of dividend increases – in fact, Barrick has already announced a 20% increase to their 2011Q4 dividend.

ABX Key Metrics

Dividend Yield

1.2%

1 year Dividend Growth Rate

25%

5 year Dividend Growth Rate

22%

Dividend Payout Ratio

8.9%

Return on Equity

18.4%

5 year Total Return

9.2%

Analyst Recommendation

BUY

Disclosure: I am long SLW, ABX.