My clients have income needs that are lasting longer and longer so it's reasonable that I think about inflation. I'm not interested in getting bogged down in the causes, or even the effects of inflation. Let's just put it out there that inflation is a certainty and needs to be handled with some wisdom by investors.
The stock market is a good place to get inflation protection if your time frame is long. It's very nature causes it to re-value constantly. Getting more specific than the broad market we can look to sectors that are very sensitive to inflation. Companies dealing in products with intrinsic value like oil and gas are good examples. Food, timber and medical services are good examples as well. But the gold sector is best. Gold has historical intrinsic value, it can be evenly divided and not lose value, it's portable on a financial scale that matters to everyday life and most important, gold carries no counter party risk.
I'm not a 'gold bug' at all, but I have found it important to put a percentage of each client's investments in gold companies. Since I focus on dividends for income Newmont (NEM) is a clear leader for this. I also use Goldcorp (GG) to further broaden a portfolio.
Newmont snapshot from Morningstar.com:
(click to enlarge)
Goldcorp snapshot below from Morningstar.com:
(click to enlarge)
Newmont is sitting at a 2.78% yield and Goldcorp is sitting at 1.37% yield. Both of these companies have raised their dividends substantially as the price of gold has increased over the past 6-8 years. Goldcorp has the smaller yield but investors enjoy the monthly payment.
These yields are small and by no means can they be expected to hold up a large percentage of a portfolio designed to pay your living expenses. However, the price of gold company stock is very sensitive to inflation. Both these companies surged Friday as you can see from the snapshots. I believe that the weak jobs report has convinced the market that stimulus via monetary easing (inflation) is coming. Hence the big move in gold and gold stocks.
My current allocation in precious metal is sitting at 8-10% for high income seeking clients. Lower income, growth oriented clients have an allocation of 12-15%. The price metrics for gold stocks are pretty solid right now. However, a deeper look is always a good idea for the gold market. It is a market surrounded by many strong feelings and not as much wise advice. Gold producers are always under the cost squeeze to get these ounces out of the ground and the politics are a wild card. Newmont has margins that are falling and Goldcorp is having some production volume issues but these are well run companies in a tough business.
An alternative to GG and NEM could be Silver Wheaton (SLW). This is a very interesting company. SLW is made up of perpetual purchase contracts for silver byproduct from (mostly) large lead, copper and tin mines. The contracts were put in place at much lower silver prices so current profits are high. Silver Wheaton has announced a dividend policy that will payout based on cash flow from sales (read about it here). The payout will be directly related to the price of silver. The SLW dividend will function with some of the characteristics of U.S.-based oil and gas trusts such as Permian Basin Trust (PBT) or San Juan Basin Trust (SJT).
Protecting a structured portfolio and income from inflation is very important. Rising dividends help, and having some gold is a good idea. If you can do both at the same time, well that's even better.
Disclosure: I am long GG, NEM, PBT.
No comments:
Post a Comment