The Most Promising Dividends in Gold Stocks

Dividend payers deserve a berth in any long-term stock portfolio. But seemingly attractive dividend yields are not always as fetching as they may appear. Let's see which companies in the gold industry offer the most promising dividends.

Yields and growth rates and payout ratios, oh my!
Before we get to those companies, though, you should understand just whyyou'd want to own dividend payers. These stocks can contribute a huge chunk of growth to your portfolio in good times, and bolster it during market downturns.

As my colleague Matt Koppenheffer has noted: "Between 2000 and 2009, the average dividend-adjusted return on stocks with market caps above $5 billion and a trailing yield of 2.5% or better was a whopping 114%. Compare that to a 19% drop for the S&P 500."

When hunting for promising dividend payers, unsophisticated investors will often just look for the highest yields they can find. While these stocks will indeed pay out the most, the yield figures apply only for the current year. Extremely steep dividend yields can be precarious, and even solid ones are vulnerable to dividend cuts.

When evaluating a company's attractiveness in terms of its dividend, it's important to examine at least three factors:

  • The current yield

  • The dividend growth

  • The payout ratio

If a company has a middling dividend yield but a history of increasing its payment substantially from year to year, it deserves extra consideration. A $3 dividend can become $7.80 in 10 years, if it grows at 10% annually. (It will top $20 after 20 years.) Thus, a 3% yield today may be more attractive than a 4% one, if the 3% company is rapidly increasing that dividend.

Next, consider the company's payout ratio, which reflects what percentage of income the company is spending on its dividend. In general, the lower the number, the better. A low payout ratio means there's plenty of room for generous dividend increases. It also means that much of the company's income remains in its hands, giving it a lot of flexibility. That money can fund the business's expansion, pay off debt, buy back shares, or even buy other companies. A steep payout ratio reflects little flexibility for the company, less room for dividend growth, and a stronger chance that if the company falls on hard times, it will have to reduce its dividend.

Peering into gold
GFI Group
is among the highest-yielding stocks in gold companies, recently yielding 4.6%. But it's not necessarily your best bet, as its payout now exceeds its income. Issues such as higher debt costs put the company in the red recently, but it's reducing costs and remains bullish.

Turning to dividend growth rates, Yamana Gold (NYS: AUY) and Agnico-Eagle Mines (NYS: AEM) lead the way, with five-year average annual dividend growth rates, respectively, of 76% and 66%. Those growth rates are so steep, though, that they will be hard to maintain for long. Still, Yamana is extremely strong in not only gold, but also silver and copper, and has an "industry-leading cost structure." Agnico-Eagle is down more than 50% over the past year due to problems at two mines, but its talented management reminds investors that it's still growing, with solid prospects. Kinross Gold (NYS: KGC) is another rapid dividend grower, averaging 19% over the past four years. Though it's been down this year after some asset writedowns, Fool gold expert Christopher Barker has recently upped his opinion of the stock considerably.

Some gold companies, such as Rubicon Minerals (NYS: RBY) and NovaGold Resources (NYS: NG) , don't pay dividends at all. That's because smaller or fast-growing companies often prefer to plow any excess cash into further growth, rather than pay it out to shareholders. Relatively small Rubicon is seen as the best in its class by some, and well-regarded Agnico-Eagle Mines likes it enough to have taken a stake in it. NovaGold has been selling off various assets recently in order to focus its operations more. It has secured $318 million in financing and has high hopes for its Alaska-based Donlin mine. Some folks are interested in NovaGold because they see it as a possible acquisition target.

Just right
As I see it, Compania de Minas Buenaventura offers the best combination of dividend traits, sporting some solid income now (recently yielding 1.8%) and a good chance of strong dividend growth in the future. It's a tough call, though. Newmont Mining and Agnico-Eagle Mines are also worth looking at, as they offer higher yields, above 2%. Yamana Gold and Kinross also seem quite promising -- their yields are lower, but they're growing rapidly.

Of course, as with all stocks, you'll want to look into more than just a company's dividend situation before making a purchase decision. Still, these stocks' compelling dividends make them great places to start your search, particularly if you're excited by the prospects for this industry. Remember, though, that you may find even more attractive dividends elsewhere, such as in foreign wireless companies or gas utilities.

Do your portfolio a favor. Don't ignore the growth you can gain from powerful dividend payers.

Looking for someAll-Star dividend-paying stocks? Look no further.

At the time thisarticle was published LongtimeFool contributorSelena Maranjian,whom you canfollow on Twitter, holds no position in any company mentioned.Click hereto see her holdings and a short bio. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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