Sprott - Hedging As A Dividend Investor

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About: Sprott Inc. (SPOXF)
by: Dividend Athlete
Summary

Precious metals are an important component of a diversified portfolio.

The problem dividend investors face, is that precious metals pay no dividends, instead require expenses/fees to hold it.

That goes against the principles of dividend investing and leaves investors without exposure to this asset class.

Sprott Inc. is an asset manager that offers various precious metal funds.

The company has paid a steady dividend throughout the precious metals downcycle.

Why Invest in Sprott

Sprott Inc. (OTCPK:SPOXF) is a Canadian asset manager with a market cap of around $715 million. The company has over $10.5 million of assets under management with a blended net management fee of 0.52%.

The company's business can be broken into 5 different segments.

Sprott Inc business

Source: Sprott Inc. Investor Relations

For the purpose of this article, I will focus on the exchange-listed products for precious metals that make up almost 75% of the total assets under management.

Where Sprott differs from precious metal ETFs and other investment options in that space, is that their Trusts store the physical bullion (in the Royal Canadian Mint) and they offer investors the chance to redeem their fund shares for the actual metal. As the company website states:

There is no levered financial institution between the unitholders and the Trusts' physical bullion and no risk of financial loss in the event of a bankruptcy or nationalization of the financial institution.

When requested by the unitholder, the Royal Canadian Mint will transport the physical metal to the investors home via their Armored Transportation Service Carrier. While that is subject to expenses and fees, it gives a certain degree of confidence, that the unitholder is not just holding a paper claim on the metal.

For this extra layer of assurance, investors are willing to pay a higher management fee to Sprott Inc. In addition to being long Sprott Inc, I have also invested in their Physical Gold&Silver Trust (CEF).

The company's share price has been closely tied to gold and silver prices. As these metals peaked in 2011, Sprott Inc. was trading at close to $10 per share.

For comparison in 2016, the share price bottomed at $1.26.

SPOXF stock price Source: Google

As the price of gold has been rising since 2016 and the price of silver up sharply in the latest months, Sprott Inc. share price has followed and currently trades at just below $3 per share. As more investors are interested in investing in precious metals, Sprott generates more revenue from managing their money.

The company has almost no debt at all and has managed the downturn in precious metal prices well, so I believe they are strongly positioned for all market conditions. Insiders own around 30% of the company if you include Chairman Emeritus Eric Sprott, so management's interest are aligned with the shareholders.

Dividends

What impresses me the most about this company, is that they have paid a continuous dividend of 0.12 CAD per share through the cycle where precious metals were out of favor. While the dividend has been kept steady, not raised, it is clear that the management is committed to maintaining it. When the prices of gold and silver shot up in 2011, the company paid out a large special dividend of 0.72 CAD, so we might get another special payout if precious metals continue their impressive run. As of 7th of August, gold has actually outperformed S&P 500 YTD.

Macro Case for Owning Precious Metals

Precious metals should be a small part of any diversified portfolio. Precious metals, especially gold, have been a global store of value for thousands of years. Investors mostly hold it as a hedge against inflation as its price tends to rise when the cost of living increases. While to investors from the US it might seem strange to worry about inflation with unemployment close to all-time lows and inflation firmly in check, but central banks globally have been revising the interest rates downward. Just yesterday New Zealand, India and Thailand reduced their interest rates, following the US Federal Reserve interest rate cut last week. With Europe and Japan stuck at extremely low interest rates for years, there is a clear trend developing.

I maintain a percentage of my portfolio in precious metals as an insurance against inflation. I actually hope those investments will not shoot up massively because that means my dividend growth portfolio is humming along as usual and I'm closing in on my retirement income goal, but it gives me a certain peace of mind to know that I am prepared for the worst.

Gold Source: Sprott Inc. Investor Relations

Summary

As dividend investors, the focus is firmly on income. But that doesn't mean we can not be hedged for the macro trends developing in 2019. Investing in precious metals offers a way to be hedged for central banks devaluing currencies. We can be diversified in precious metals and still receive dividends through investing in Sprott Inc. that makes money from managing investors exposure to those metals.

Disclosure: I am/we are long SPOXF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am invested in the TSX-listed SII and Sprott's CEF trust.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.