Top Dividend Stocks Paying Royalty Income
These top dividend stocks come from Robert Baillieul, Editor-in-Chief of IncomeInvestors.com.
In this interview, Robert reveals one of his favorite income ideas: gold royalty checks. These resource firms have paid out dependable income for decades. Insiders have made a fortune, and a number of billionaires are quietly building up positions.
Few people outside the industry, however, even know they exist. This interview will show you how to begin collecting these gold royalties while diversifying your money outside of regular stocks and bonds.
Income Investors: Robert, you’ve done a lot of research on royalties over the years. You’ve been a big proponent of this idea, calling them “the ultimate retirement income.” What is so special about these top dividend stocks?
Robert Baillieul: Yes, I’ve literally spent hundreds of hours researching royalty investments. They come up a lot in my conversations with executives and industry analysts. Over the years, I’ve recommended many such companies to my readers.
A royalty is a payment to an owner for the use of their property. Musicians, for example, collect a royalty every time someone buys their album or their song is played on the radio. Landowners earn a fee on every ounce of gold or barrel of oil hauled out of the ground beneath their property.
Once the royalty stream is set up, the owners don’t actually have to do anything. Their checks arrive in the mailbox each month. Owners can lock in a stream of income that can last for decades.
These deals can be extremely lucrative. Take J.K. Rowling, for example. According to Forbes, she has earned over $1.0 billion in royalties from her Harry Potter book series. Every time a novel is sold, she gets a piece of the action. (Source: “J.K. Rowling Is No Longer A Billionaire, Booted Off Forbes List,” Business Insider, March 12, 2012.)
The Ambassador Bridge, which links Detroit and Canada, is another great example. Billionaire Manuel “Matty” Moroun earns an estimated $164,000 per day, or a cool $60.0-million per year, in royalty income from the property. Not too shabby, considering he purchased it for only $30.0 million back in 1979. (Source: “This secretive billionaire family owns the Ambassador Bridge,” The Toronto Star, February 16, 2010.)
Income Investors: Where are you looking for royalty income right now?
Robert Baillieul: Gold royalty owners like Royal Gold, Inc. (NASDAQ:RGLD), Franco-Nevada Corp (NYSE:FNV), and Sandstorm Gold Ltd (NYSEMKT:SAND) are some of my favorites.
Royalty companies front miners the cash they need to build a new project. In exchange, the miner agrees to pay a predetermined fee on every ounce of gold or silver produced.
This creates a lucrative income stream. Once the project is up and running, the royalty companies get a piece of the mine’s revenue. These fees vary by project, but typically range between two and five percent.
Better yet, these royalty contracts last forever. As long as there’s gold or silver under the ground, the royalty company is entitled to their cut. Any profits can be paid out to shareholders or reinvested back into the business to earn even more income.
You could think of these companies like a kind of “resource tollbooth.” Each time a tractor carries a load of ore from the mine, it must pay a fee. For every 100 ounces of gold carried, two to five ounces must be paid to the tollbooth (between $2,400 and $6,000). This happens day after day… month after month… year after year.
Top Dividend Stocks: Royalties
| Company |
Market Cap |
Yield |
| Franco Nevada Corp (NYSE:FNV) |
10.2B |
1.6% |
| Silver Wheaton Corp. (USA) |
$7.5B |
1.3% |
| Royal Gold, Inc. (USA) (NASDAQ:RGLD) |
$4.3B |
1.4% |
| Osisko Gold Royalties Ltd (NYSE:OR) |
$1.0B |
1.3% |
| Sandstorm Gold Ltd (NYSEMKT:SAND) |
560.3M |
0.0% |
Source: Google Finance
The deal is actually a win-win for everybody.
Selling a royalty stake gives miners a low-risk way to finance their projects. If a company takes out a loan, they have to pay back the money, even if the mine never pans out. Royalties only have to be paid if the mine starts producing.
The royalty company, on the other hand, secures a lucrative income stream. Once the mine is up and running, the cash starts flowing in. These payouts can continue for decades.
Income Investors: Why don’t more people invest in royalties over mining stocks?
Robert Baillieul: Well, probably because there are thousands of mining companies.
Big miners always need money, so they do a lot of deals with investment banks. For this reason, brokers have to constantly push these stocks on clients.
By comparison, there are fewer than a dozen or so royalty businesses publicly listed. As far as I know, only a few analysts cover these companies full-time. And because they rarely need cash, royalty firms don’t do a lot of business with the big investment houses.
The word is starting to get out, though.
When I visit mining conferences, royalties are the top topic of conversation. During the after-hours galas off limits to the general public, everyone is talking about them. You’re starting to see a lot of research firms recommending these names to their best clients.
Some of the world’s smartest money managers are also getting in. Billionaire investor Jim Simons has been quietly building up positions. A number of other hedge fund giants—including Ken Griffin, Chuck Royce, and D.E. Shaw—also own large stakes.
When the world’s best investors start moving in, you should stop and take notice.
Income Investors: How lucrative are these top dividend stocks?
Robert Baillieul: These top dividend stocks have two “drivers” that can really crank up investor returns.
Driver number one: royalty contracts often include not only the mine itself, but also the acreage surrounding the property.
So, why is this a big deal?
Gold deposits often occur in clusters. In other words, if a miner strikes a big gold find, there’s a good chance more will be found nearby. These royalty investments don’t depend on these extra discoveries to make money. But if more gold is uncovered, it can result in a windfall of extra royalty income.
Driver number two: higher gold prices can send profits into overdrive.
Royalties are usually expressed as percentage of a mine’s output. This means any increase in gold prices automatically translates into an increase in royalty income.
For example:
- When gold is priced at $1,000 per ounce, a five-percent toll equates to a profit of $50.00 per ounce.
- At $2,000, the same five-percent toll yields $100.00 per ounce.
- And if gold prices were to climb to $3,500, the same toll would now generate $175.00 per ounce.
This one-two combination means these companies are some of the top dividend stocks around. I like to think of the income they produce as my gold royalty checks.
Royal Gold Corp, for example, has hiked its distribution for 15 straight years. Today, the company pays an annual dividend of $0.92 per share, which comes out to a yield of 1.4%.
Franco Nevada also gushes dividends. Since going public, the company has boosted its payout nine years in a row. Today, the stock yields 1.6%.
Sure, these yields won’t knock your socks off. Right now, these companies are ploughing their profits into more royalty agreements. But as these new deals comes on-line, I expect these dividend payouts will soar.
Income Investors: What are the advantages of owning royalty companies over bullion and regular mining stocks?
Robert Baillieul: You probably won’t hear this from any resource analyst, but mining is a horrible business.
Most of the easy gold has been found. Today, you have to trek to some godforsaken part of the world. Most of the holes you dig in the ground will be worthless.
Even if you do find something, building a mine is a tough gig. You can run into unions, protesters, and regulators. Once you get something out of the ground, you then have to shift through tons of rock and muck just to process a few ounces.
And you’re not done yet!
After that, you have to grade, transport, and refine your ore. You can be sure every middleman, government, and landowner wants their piece of the pie. When you own a mining stock, you’re preying they can find anything, let alone make a profit.
The numbers are awful. Over the past two decades, some top miners like Barrick Gold Corp (NYSE:ABX) have never produced a single dollar in profit for shareholders. That’s worse than buying ocean front property in Nebraska.
Seriously, reading through some of these financial statements makes me red. My veins get so swollen, they look like they’re going to rupture and burst. I swear some of these executives have a Ph.D. from D.U.M.B.
Junior miners are worse. If you were to combine every junior firm in the world into a single entity, that business would lose $2.0 billion in a good year. How much would you pay for a company that never made money?
Guys in the business always tell me, “Rob, you need to be more positive.” Well, I’m positive your business is going down the drain! Sure, a few gold miners hit it big. These are the one-off winners that keep this whole game going.
Royalty companies, in contrast, don’t have a lot of these problems. Their costs are mostly fixed, consisting of one up-front cash payment. You don’t have to worry about some accident wiping out your profits.
A big mining company might have hundreds of employees, plus thousands of contractors. A royalty company has almost no employees, expect for some administrative folks. These people just make sure the checks get cashed, which frees up a lot more money for dividends.
Plus, you’re diversified. Most miners bet the farm on a handful of projects. Royalty companies, on the other hand, are often involved in dozens of deals. If one project goes belly up, it’s not the end of the world.
For these reasons, they’ve beaten the pants off of gold mining stocks for decades. The Market Vectors Gold Miners Index (GDX), which measures the performance of the top miners, has seen its value cut in half over the past eight years. Royalty owners, though, have posted great returns and they’re some of the top dividend stocks around.
I’m also not a big gold bug.
Sure, bullion provides inflation protection. As an investor, though, I’d much rather own a piece of productive companies than a hunk of metal. Royalty owners provide the same hedge against rising prices, but their actual businesses can grow and compound over time.
Take Silver Wheaton Corp. (NYSE:SLW), a company focused on silver mines rather than gold. In 2005, one share represented about 0.5 ounces in silver reserves. Today, that same share is now backed up by five ounces. This growth has allowed royalty companies to outperform raw bullion over the long haul. (Source: “May 2016 – Corporate Presentation,” Silver Wheaton Corp., May 9, 2016.)
Income Investors: There are many good points to royalty owners. Any downsides?
Robert Baillieul: While these are some of my top dividend stocks, they’re no sure things.
Dividends can only be paid if gold gets hauled out of the ground. If a mine were to become unprofitable, either because costs rise or gold prices plunge, the project could simply shut down. That means no production and no royalty checks.
Nationalization is another real risk. Say some communist rebels overtake a capital building. Now your mine is an asset of the “People’s Republic.” If you happen to be doing business in one of these countries, you can kiss your money goodbye.
Royalty companies also offer less upside than junior mining stocks. These firms don’t produce gold yet, but rather focus on searching for the next big strike. While risky (less than one in 3,000 deposits turn into a producing mine), junior mining stocks can deliver over-10,000% gains when they hit paydirt.
By sticking to the top dividend stocks in the space, however, you can protect yourself from some of these risks.
I do a deep dive into every royalty company before investing. I want to make sure their mining partners will continue running even if gold prices drop. I also focus on safe mining jurisdictions like the U.S., Canada, and Mexico.
Taking these measures will eliminate lotto ticket type windfalls. Most investors I know, though, are content to earn safe, reliable returns. They’re not that interested in “shooting for the moon” on some penny stock.
Income Investors: What are your top dividend stocks in the royalty space?
Robert Baillieul: Royal Gold is best of breed.
The company practically invented the business back in the 1980s. Over the past 30 years, their executives have assembled a top-tier portfolio of income streams. They meet a lot of the criteria I just mentioned: low-cost mines in low-risk jurisdictions that are already producing gold.
Silver Wheaton is another favorite. I’ve chatted with CEO Randy Smallwood personally. While most executives want to build corporate empires, Randy is focused on rewarding shareholders.
Every dollar he reinvests back into the business must earn a top return. If not, Randy will hand the funds back to shareholders. Sure, that sounds like common sense, but you almost never see this in the resource sector.
Finally, I’m also a fan of Sandstorm Gold.
New royalty companies often generate triple-digit returns during their first few years. Investors in Royal Gold and Silver Wheaton struck it rich after their initial public offerings. But as these businesses mature, they tend to settle into reliable top dividend stocks.
Sandstorm Gold is a chance to get in on the ground floor of a new royalty company. In my conversation with CEO Nolan Watson, he laid out his company’s aggressive expansion strategy. The business doesn’t pay a dividend yet, but that could change as the royalty fees start rolling in.
Income Investors: Thanks, Rob, for sharing some of your top dividend stocks.
Robert Baillieul: No problem, guys. You’re welcome.