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Buy Gold with Dividend Income

September 12, 2019

For the first time in my professional career, I’m recommending a gold investment due to a few specific reasons.

On its own, gold offers no yield. Worse, it costs money to store and hold it. Investors buying in are baking in a loss if the price of the metal goes nowhere.

So, I am not making this recommendation lightly.

But with lower inflation and lower and falling interest rates, gold is becoming more attractive right now.

Mining Gold Prices

Two of the major drivers of gold prices are interest rates and the value of the US dollar. Since gold for US investors is priced in dollars, if the dollar goes down (all things being equal), gold will tend to rise. And because interest rates provide the opportunity cost of holding gold, falling rates means gold is cheaper to own.

The US dollar has been generally stronger against most of the major commercial and financial currencies of the world. The Bloomberg US Dollar Index gathers together the leading currencies and updates their weightings against the dollar on an annual basis.

But recently, the dollar has come down from its highs. And since the dollar is highly impacted by changes in short-term interest rates, falling rates should help to drive the dollar lower over time.

If you look at the relationship between the dollar and gold, you can see that during FOMC tightening last year, the dollar was stronger and gold was lackluster until the fourth quarter when stocks took a tumble and, with that, another one of the opportunity costs to holding gold.

And as the dollar slipped into early 2019, gold continued to rise. The same has been the case in recent weeks, with the dollar slipping and gold rising.

Spot Gold (Gold) & Bloomberg US Dollar Index (White)—Source: Bloomberg Finance, L.P.

Then, if we look at short-term US dollar interest rates, as measured by the three-month London Interbank Offer Rate (LIBOR), you can see that gold muddled along for much of 2018 as LIBOR went up. But for 2019, LIBOR has been slipping and sliding while gold has been on the rise.

Spot Gold (Gold) & US Dollar Three-Month Libor Rates (White)—Source: Bloomberg Finance, L.P.

In addition, while the US Federal Reserve Bank and its Open Market Committee (FOMC) should further ease monetary policy, driving down US interest rates, the European Central Bank (ECB) just took action to drive rates further into negative territory. All of this further supports the price of gold in US dollars and in euros.

Global Uncertainty Bolsters Gold

US interest rates and the dollar are just two of the major factors in pricing gold. In addition, gold is getting buying attention as the rest of the globe remains in less desirable economic conditions.

Europe and parts of Asia are in economic trouble and show little progress in their core economies. They face many political headwinds as well.

Specifically, in key European and Japanese markets, interest rates are in actual negative ranges, with depositors paying rather than receiving interest. And that extends further into the bond markets, with government and an increasing number of corporate bonds having negative yields.

That means bonds cost money to hold outside of the US bond markets, which helps gold demand outside the US.

But back in the US, politics and the 2020 elections are fully engaged and are presenting their own challenges, with investors and strategists plotting alternatives as we get closer and closer to November of next year. Gold tends to perform well during periods of uncertainty.

A Better Way to Own Gold

As I noted above, gold costs money to hold as an investment. To buy and sell gold, you have to deal with commission costs and bid/offer spreads. And of course, there are storage costs. Even the leading gold ETF—the SPDR Gold Shares (GLD)—has its underlying charges equating to 40 basis points (0.40%) per year. GLD doesn’t pay a penny in dividends either.

With that in mind, the better way to own gold is to buy Franco-Nevada Corporation (FNV). FNV isn’t a mining company. It long ago figured out that mining wasn’t the most profitable or predictable way to cash in on gold.

Instead, the company acquires and holds royalty interests from gold producers and owns proceeds from gold mining companies. This means that it doesn’t have to buy and run mines or deal with all of the capital equipment expenses, which removes a whole lot of costs and uncertainty from its business.

It just collects cash from gold production by others. If gold goes higher in price, the company makes more revenue. If gold goes down in price, the company makes less, but it still makes money.

And it pays its shareholders their cut of the profits from gold revenues flowing across its books. That equates to a dividend yield of 1.06%, which has been on the rise in actual distributions over the past five years by an average of 3.93% per year. That’s not a big yield, but it is way better than GLD costing 40 basis points.

Franco-Nevada stock is proving out to be the better way to own gold. Over the trailing year, FNV has generated a total return of 62.01% against GLD’s return of 23.81%. That’s a 160.44% better return.

Franco-Nevada (FNV, White) & SPDR Gold Shares (GLD, Red) Total Returns—Source: Bloomberg Finance, L.P.

Over the past five years, FNV has outperformed GLD by a total return margin of 433.03%.

I am recommending FNV as a dividend-paying way to buy and own gold, ideally in a taxable account.

Current Canadian and US tax treaties have Canada pledging to not withhold income taxes on US individual investors holding Canadian stocks like FNV in retirement accounts, which makes it eligible for tax-free accounts. However, there is no guarantee that this tax policy won’t change.

Buy Franco-Nevada for exposure to gold with the added bonus of further dividend income.

All My Best,

Neil George
Editor, Dividend Digest & Profitable Investing

PS—Now that I’ve shown you a better way to own gold while collecting additional dividend income, be sure to check out my Profitable Investing advisory for more of my market research and recommendations for safer growth and bigger, more reliable income.