Gold is generally considered a safe haven asset that investors run to in times of fear. Given that the stock market is near all-time highs despite a worldwide pandemic and increasing global debt levels, the safe haven nature of gold might sound pretty alluring right now. If it does, you'll want to look at this pair of unique gold stocks.
Go with the stream
You can add gold to your portfolio by purchasing bullion. The problem is you have to store it safely, and the only potential upside comes from higher gold prices. You can get out from under the storage issue by acquiring an exchange traded fund that owns gold, but you still only benefit if gold prices go up.
Miners are another alternative, since they benefit from selling the gold they mine at higher prices when gold rallies and they can expand their businesses over time, providing an avenue for growth. The problem here is that there are fixed costs in mining, and when gold falls profitability can quickly vanish.
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That's why most investors will probably be better off with a streaming and royalty company like Royal Gold (RGLD -0.60%) or Franco-Nevada (FNV -0.31%). Streamers basically pay miners an upfront fee for the right to buy gold at reduced rates in the future. Miners use the cash, which they get access to without having to tap the capital markets, to fund investments or debt reduction efforts. The streamers get to lock in wide margins. To put a number on that, a recent streaming deal for Royal Gold requires it to pay just 20% of the gold spot price up to certain production targets, and then a still-low 40% thereafter. Note that the wide profit margin here is locked in because its costs go up and down with the price of gold. That's a big win, and helps provide material consistency to the business.
This is exactly why investors should favor streaming and royalty names. Simply put, they provide exposure to precious metals, have robust profit margins (in good markets and bad) because of the low locked-in prices, and they can grow their businesses by investing in new streaming deals. It's a good balance of risk and reward -- especially since they also have portfolios that span across different regions and mining partners. Diversification is good for your portfolio, and it's good for a streamer's portfolio too.
Pure-ish play
Precious metals are generally found together, often with other non-precious metals as well. So there's really no such thing as a pure-play streaming company or miner. However, Royal Gold got roughly 74% of its revenue from gold in fiscal 2021, with the rest coming from a mix of copper, silver, and "other" metals. That makes it the most exposed to the so-called barbarous metal when compared to its closest peers.
What's also quite interesting is that Royal Gold has increased its dividend annually for 20 consecutive years. Gold is a highly volatile commodity prone to swift ups and downs. Royal Gold's ability to pay a consistently growing dividend is a testament to the strength of its business model. And there's no reason to think things will change, given that it ended fiscal 2021 with little debt and a collection of investments that are either just starting to produce or moving toward first production, and gold prices remain elevated. To be fair, Royal Gold's dividend yield is a miserly 1.1% today, which is at best middle-of-the-road when you look at its historical yield range. However, for investors looking to add some diversification to their portfolios with a gold play, this is a name you can buy and comfortably hold for a very long time.
RGLD Gross Profit Margin data by YCharts
A diversified diversifier
That said, if diversification is the real goal you are after as you look for a gold-linked investment, then you might want to consider Franco-Nevada. It generates around 56% of revenue from gold, with silver and platinum-group metals (two other important precious metals) chipping in 19%. "Other" metals add 11%, and energy 14%. It also has one of the largest investment portfolios in the streaming/royalty space. Diversification is basically at the core of everything this company does, making it a good way to get exposure to gold and to hedge your gold bet at the exact same time.
What's notable is that you aren't giving up much to get these diversification benefits. For example, the yield is 0.85% -- not a big difference on an absolute basis compared to Royal Gold, and Franco-Nevada has increased the payment annually for 14 years, which happens to be each year since its IPO. It stands toe-to-toe with Royal Gold in many ways, the big difference being a lower reliance on gold to fuel the top and bottom lines. But 56% is not a small number, so for more conservative types, this streaming and royalty name might actually be a better option than more focused Royal Gold.
A reality check
Royal Gold and Franco-Nevada are two very good ways to add some gold exposure to your portfolio. And because of their advantaged streaming/royalty business models, they can really be bought and held for a very long time.
That said, adding gold to your portfolio should be looked at as a diversification tool and not as a way to time the ups and downs of the broader stock market or the precious metals sector. A small, long-term commitment to one of these two names is, for most, the best course of action. Anything more than that and you start to border on market timing, which is usually a dangerous game to play.
