High-Yield Gold Stocks Offering Growth, Downside Protection And Income

by: Quad 7 Capital

Investors have raked in profits in gold stocks in the last 6 weeks due to anticipated European Central Bank bond buying and a third round of quantitative easing by the Federal Reserve. In the month of August the SPDR Gold ETF (NYSEARCA:GLD), a popular investment tool as an alternative to physical coins and bullion, was up 4.9%. I predicted that gold mining stocks would outperform the metal and made the call in late July to pick up some of the gold miners. The gold mining ETF (NYSEARCA:GDX) was up 12% in August while the junior gold miners ETF (NYSEARCA:GDXJ) was up 12.8%. The growth is continuing in September as the GLD, GDX and GDXJ are up another 2.2%, 4.9% and 8.5% respectively. I still maintain the opinion that the gold stocks can continue to outperform the metals as they re-establish a strong correlation with the price of gold.

Early in August I highlighted the strengths and weaknesses of the largest five gold companies in the world. One item that caught my attention was the dividend yield of these companies. All five companies paid a nice dividend although none of the company's dividends exceeded 3%. The most sizable dividend paid is by Newmont Mining (NYSE:NEM) at 2.7% followed by Barrick Gold (NYSE:ABX) at 2.0%. AngloGold Ashanti (NYSE:AU), Yamana Gold (NYSE:AUY) and Goldcorp (NYSE:GG) round out the pack with yields of 1.8%, 1.5% and 1.2% respectively. This aspect of the gold miner analysis led me to search for high-yielding gold stocks as I believe that they offer growth along with the other miners but also dividend protection should gold or the overall market sell off. As the price of a stock drops the dividend yield becomes higher. Further, a high dividend provides income just for owning the stock, which can then be compounded over time if the dividend is reinvested. Using a cutoff of 2.8% or higher annual yield I wished to identify high-yielding gold stocks. In this article I highlight two gold companies that offer growth and dividend protection as well as one closed-end fund that offers monthly income.

Gold Fields Limited (NYSE:GFI): GFI is engaged in gold mining and related activities including exploration, extraction, processing and smelting. GFI is a producer of gold and a holder of gold reserves in South Africa, Ghana, Australia and Peru. In Peru, Gold Fields also produces copper. It is primarily involved in underground and surface gold and copper mining and related activities. It also has an interest in a platinum group metal exploration project in Finland. Gold bullion is its principal product, which is produced in South Africa, Ghana and Australia. GFI then sells the bullion primarily in South Africa as well as internationally. GFI holds interests in eight operating mines in South Africa, Peru, Ghana, and Australia. As of February 27, 2012, the company had total attributable precious metal and gold equivalent mineral resources of 217.0 million ounces and mineral reserves of 80.6 million ounces.

GFI Currently trades at $13.28 a share and attempts to pay a dividend that is roughly 25-35% of its cash earnings depending on investment opportunities. The yield on the stock has been over 3% for some time until this past week where the stock gained 8% to push the yield just under 3%. Still it offers a great return, although the dividend fluctuates based on earnings. One issue that could impact earnings on the company is the recent set of strikes that have been occurring in the South African mines over the last few weeks. Earnings could be hit as the strikes have undoubtedly impacted production. The stock has a current p/e ratio of 9.6 and a forward p/e ratio of 7.4. The stock trades on average daily volume of 3.6 million and has a 52-week range of $11.71 to $18.49.

Gold Resource Corporation (NYSEMKT:GORO): GORO is an exploration stage company that engages in the exploration for and production of gold and silver in Mexico. It also explores copper, lead and zinc ores. During the year ended December 31, 2011 GORO produced a total of 66,159 gold equivalent ounces from the El Aguila Project. During 2011, the GORO's exploration was focused primarily on developing the El Aguila Project. GORO classifies its mineral properties into two categories; operating properties and exploration properties. Operating properties are properties on which the GORO currently operates a producing mine. As of December 31, 2011, GORO had a total interest in six properties, one operating property and five exploration properties in the southern state of Oaxaca, Mexico. In June 2011, GORO acquired an additional property between the El Rey property and Alta Gracia property referred to as the El Chamizo property.

According to the property site descriptions GORO has more exploration properties than operating properties, which could mean the company can continue to grow as it explores and develop the properties. The operating properties El Aguila and El Aire concessions are part of the El Aguila Project and the La Tehuana concession consists of the Las Margaritas property. The El Aguila Project is located in the Sierra Madre del Sur mountains of southern Mexico, in the central part of the State of Oaxaca. The El Aguila Project is located in the San Jose de Gracia Mining District in Oaxaca. During 2011, the combined open pit and underground ore that it processed through the mill averaged 619 tons of ore per day and totaled 214,215 tons for the year, with an average grade of 3.43 grams per ton gold and 357 grams per ton silver.

The exploration properties such as the El Rey property consist of concessions in another area in the state of Oaxaca known as El Rey, El Virrey, La Reyna and El Marquez. The El Rey property is approximately 64.4 kilometers (40 miles) from the El Aguila Project. As of December 31, 2011, the company had drilled 48 core holes for a total of 5,278 meters (17,316 feet) at the El Rey property. The Las Margaritas property is made up of the La Tehuana concession. It consists of approximately 925 hectares located adjacent to the El Aguila Project.

The Solaga property consists of two mining concessions totaling 618 hectares known as Solaga I and Solaga II. The property is located approximately 120 kilometers (75 miles) northeast of the El Aguila Project. The company has acquired claims adjacent to the Las Margaritas property in the Alta Gracia Mining District, namely the Alta Gracia property. These concessions consist of three mining claims, the David 1, the David 2 and La Hurradura. The concessions total 5,175 hectares. The El Chamizo Property totaled approximately 26,386 hectares (101 square miles).

GORO currently trades at $20.65 a share on average daily volume of 326,000. GORO pays a monthly divided of 6 cents and had raised the dividend each year from 2010 to present day. At 6 cents a share monthly the company is offering a bountiful 3.5% annual yield, far higher than its competitors in the mining space. The company currently has a p/e of 16 and a forward p/e of 14.1. The stock has a 52-week range of $15.06 to $28.37.

GAMCO Global Gold, Natural Resources And Income Trust (NYSEMKT:GGN): GGN by Gabelli was formerly known as the Gabelli Global Gold, Natural Resources And Income Trust. GGN is a non-diversified, closed-end management investment company. GGN's primary investment objective is to provide a level of current income. GGN is a fund that invests primarily in equity securities of gold and natural resources companies and focuses to earn income primarily through a strategy of writing and selling primarily covered call options on equity securities in its portfolio. With this strategy GGN cuts off its upside as it forgoes the opportunity to participate fully in the appreciation of the underlying equity security above the exercise price of the option. However GGN makes money when the underlying security falls. Although the name has changed, GGN is still managed by Gabelli Funds, which is a subsidiary of GAMCO Investors, Inc.

The fund currently trades at $14.48 a share. The fund pays a high monthly dividend of 14 cents a share, which offers investors a whopping annual yield of 11.6% annually. The funds' float is only 7% institutionally owned, which helps prevent wild swings in the unit price of the fund. However, it is fairly correlated with the price of gold and gold equities so it tends to move in the direction of those stocks. GGN has a 52-week range of $12.70 to $16.87.

Bottom line: I continue to believe gold stocks will outperform gold over the next year. In this article I highlighted two high-yielding gold stocks that have growth potential but offer downside protection with a dividend floor. Further, for those investors seeking income I highlighted a close-end fund, which I think could appreciate in share price as gold and gold stocks appreciate. Further it offers a massive 11.6% annual yield. While I think that the junior and large-cap miners will offer great returns in the next year, the companies in this article offer better income and donwside protection opportunities.

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