How To Capture Rising Dividends From Gold Stocks

|
Includes: EOG, GLD, HL, NEM
by: Greg Group

When the U.S. Dollar started rallying at mid-year 2011, the price of gold plummeted from $1900 per ounce to $1525 per ounce in September. This was a 20% price drop in a month! This created a similar fear reaction in gold and gold mining stocks. Gold finished 2011 at around $1565 per ounce.

However, this fear of a stronger dollar got turned on its head when the Fed recently came out and announced that not only were they not going to raise rates any time soon, but they were actually pushing out their time frame to 2014, far beyond what anybody on the Street had forecast.

At the end of January 2012, gold was trading at $1739 up 11% from the 2011 year-end close. As measured by the Spider Gold Trust (NYSEARCA:GLD), gold confirmed a bullish trend. GLD rose above the highs of the previous 8 weeks on 1/31/12 and broke out above a 4-month downtrend line on 1/25/12 (see chart below). GLD rose above its 50-day SMA on 1/23/12. GLD remains above its 200-day SMA, and the 50-day SMA has remained bullishly above the 200-day SMA every day since 2/11/09.

This is important as several mining stocks have pegged their dividend payout to the price of gold. The largest mining stock, Newmont Mining (NYSE:NEM) started this in 2011. Newmont's gold price-linked dividend policy contemplates a quarterly payable dividend based on Newmont's average realized gold price for the preceding quarter. The annual payout will increase at a rate of $0.20 per share for each $100 per ounce rise in the average realized gold price.

NEM raised its dividend each quarter throughout 2011. The second quarter 2011 dividend of $0.20 per share was declared in consideration of Newmont's first quarter 2011 average realized gold sales price of $1,382 an ounce (i.e. between $1,300 - $1,399 per ounce). This was a 33% increase from the 1st quarter dividend of $0.15. The third quarter 2011 dividend of $0.30 per share was raised based on Newmont's second quarter 2011 average realized gold sales price of $1,501 an ounce (i.e. between $1,500 - $1,599 per ounce).

The Company's quarterly dividend will increase at a rate of $0.05 per share for each $100 per ounce rise in the average realized gold sales price for the preceding quarter. As shown in the table below, id gold prices return to $1900 per ounce, NEM will pay a dividend of $0.50 or a dividend yield of 3.3% on its current price of $61.50. The current dividend will double to $0.60 per share if gold hits the $2100 per ounce price.

The bottom line is if you believe gold prices will continue to advance throughout 2012, then you will have a significant dividend increase from current levels the future quarters. NEM will report earnings on February 24. The dividend will likely remain at the $0.30 level as this is dependent on 4th quarter gold prices. However, NEM should have a nice dividend boost when they report 1st quarter 2012 results in May 2012.

On October 17 2011, Eldorado Gold (NYSE:EOG) announced an enhancement to the formula underlying its existing dividend policy. The formula used to create the semi-annual dividend fund will continue to be linked to the gold price and the number of ounces sold, and it will also provide additional step-ups as the average realized gold price increases. The dividend amount will be determined as fixed dollar amount per ounce of gold sold. Eldorado is a gold producing, exploration and development company actively growing businesses in Brazil, China, Greece, and Turkey and surrounding regions.

This same dividend policy has carried over to dividends based on the price of silver. Hecla Mining Company (NYSE:HL) pays a silver price-linked common stock dividend based on Hecla's average realized silver price for the preceding quarter. Realized prices are calculated by dividing gross revenues for each metal by the payable quantities of each metal included in concentrate and doré sold during the period. Any quarterly Common Stock dividend declared by Hecla will increase or decrease by $0.01 per share ($0.04 annually) for each $5.00 per ounce incremental increase or decrease in the average realized silver price in the preceding quarter.

HL produces silver from two mines: Greens Creek in Alaska and Lucky Friday in Idaho. In addition to mine site exploration, Hecla has three major exploration projects, Silver Valley in northern Idaho, San Juan Silver in Creede, Colorado, and San Sebastian in Durango, Mexico. Hecla has developed a solid base with long-life, low-cost mines; four district-sized land positions with organic growth opportunities; and an excellent cash position with no debt.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.