We all know that gold itself isnâ€™t an income generator, as it doesnâ€™t pay interest. In fact, it doesnâ€™t pay anything.
Nevertheless, Iâ€™m a big proponent of owning gold. Itâ€™s commonly referred to as a safe haven, protecting your wealth when thereâ€™s inflation.
The reason for this is that thereâ€™s an inverse relationship between currency, dollars and commodities like gold. In other words, as the purchasing power of the dollar declines, the price of gold rises.
Fortunately, right now thereâ€™s an appealing opportunity to establish an income stream and potentially profit from the rising price of gold.
Namely, through ownership of gold mining stocksâ€¦
Junior Miners, Senior Yields
As it turns out, some gold mining stocks, mutual funds and exchange traded funds (ETF) are dividends payers.
Among the major gold companies alone, there are several: Newmont Mining (NYSE: NEM) at 2.52%, Barrick Gold (NYSE: ABX) at 1.95% and Yamana Gold (NYSE: AUY) at 1.39%.
These yields arenâ€™t horrible, but we can do better. Namely, in the group of mining companies called â€śJunior Miners,â€ť which tend to be in the earlier phases of gold mining, production and exploration.
On an individual basis, these stocks tend to be riskier than the more established gold companies. So the safer way to invest in junior miners is with an ETF or mutual fund. Funds enable investors to spread out their risk over many companies (dozens or even hundreds) in a very convenient way.
The Market Vectors Junior Gold Miners ETF (NYSE: GDXJ) is a good way to gain exposure to the juniors and earn dividend income while potentially profiting from this sector.
GDXJ has a current dividend yield of 4.97%. Thatâ€™s nearly twice as much as the highest payer I quoted above, Newmont Mining, which is paying 2.52% â€“ more than three times Yamana Goldâ€™s dividend.
By buying the ETF rather than individual companies, we eliminate â€ścompany riskâ€ť â€“ i.e. the likelihood that we may be correct about the sector but wrong about the company.
Whatâ€™s more, while we happily collect our dividend payments we can also look forward to potential capital appreciation of the share price.
And because of the Fedâ€™s newly announced â€śQE-infinity,â€ť instabilities in Europe and the implementation of easy monetary policy in other countries, inflation risks abound. In other words, Gold is almost inevitably set to go higher. And with higher gold prices, comes increased demand, which is of course good for the gold mining businessâ€¦
Even though since mid-2011 GDXJ has lagged the price of gold, we see that the upward trend is beginning to gain momentum. Hereâ€™s a chart comparing GDXJ with GLD, the SPDR Gold Trust ETF (NYSE: GLD).
This three-year chart illustrates the ups and downs of both GDXJ and GLD.
Notably, GDXJ has some catching up to do.
Since July 2012 (the far right of the chart), GDXJ has appreciated along with GLD but had fallen further from its previous peak. GLD also sustained some volatility during this period but has resumed its trend higher.
Yes, thereâ€™s some risk in this investment. Namely, that gold prices decline.Â But a fall in gold prices is also very unlikely. A whole host of stubborn factors would need to give way for gold to head south.
The U.S. economy would have to suddenly and provably begin growing at a pace above 2%â€¦ the European Union would have to truly â€śunifyâ€ť and resolve the seemingly impossible fiscal problems in member countries like Greeceâ€¦
Chinaâ€™s massive slowdown would need reverse course, returning to the growth that had been such a positive contributor to global GDP over the past decadeâ€¦ Not to mention the resolution of other looming problems, like whoâ€™s going to win the presidential election, the Fiscal Cliff, instabilities in Syria, North Korea and Iranâ€¦
Bottom line: By the looks of it, goldâ€™s not heading downwards any time soon. And as gold prices rise, so will GDXJ.
In the meantime we may experience some limited volatility, but while the trend settles to the upside, we have a nice, nearly 5% dividend to take comfort in. Until next timeâ€¦
Source: Dividends and Income Daily