3 Gold Stocks to Protect Against Inflation

Conventional thinking among investors is that gold can be an excellent hedge against inflation. Typically, gold is inversely valued against the U.S. dollar. When inflation runs high, the dollar weakens as its ability to purchase goods falls. When this occurs, investors might consider purchasing precious metals, such as gold. This could be an especially pertinent investment strategy considering that the Consumer Price Index rose 0.9% on a seasonal adjusted basis in October. When including all items, CPI was higher by 6.2% last month. Investors can choose to own actual gold bars or the ETF that follows the price of gold, SPDR Gold Shares , as a way to access the precious metal. For investors looking for more from their gold positions, such as dividend income, owning shares of companies can be a way to counter inflation. This article will examine three top gold stocks, including: Barrick Gold Corporation Freeport-McMoRan Inc. Royal Gold Inc. Barrick Gold Barrick Gold has been in business for nearly 40 years, becoming the largest gold mining company in the world during this time. The company has proven gold reserves of more than 62 million ounces as well as 10 billion pounds of proven copper reserves. It is valued at $37.5 billion today and generates annual revenue approaching $13 billion. Barrick Gold came into its most current form following its $6.5 billion purchase of Randgold. Completed at the beginning of 2019, the mega-merger has the new company well positioned given its market-leading gold-mining abilities. The addition also helps to improve reserves, which had been on the decline for the parent company. The sheer number of proven ounces also sets the company apart from the competition as it will take nearly 15 years to deplete based on the most recent quarter's production. However, the most recent result didn't reflect the strength of the business, at least at first glance. Barrick Gold reported third-quarter earnings results on Nov. 4. Adjusted earnings per share was nearly half of last year's result and revenue fell more than 20% due to lower production of gold and a decline in the price of metal. Still, the quarterly results in a vacuum were some of the better numbers that the company has posted in recent years. The prior year saw one of Barrick Gold's best quarterly performances in some time, so much of the year-over-year declines can be attributed to a difficult comparable period. As the company's fortunes rise and fall primarily with the price of gold and how much it can mine, a steady dividend has been a rarity for the company. In the last decade alone, Barrick Gold has reduced its dividend on four separate occasions. However, since bottoming in 2016, shareholders have received five consecutive years of dividend growth. Growth has been robust as shareholders will receive nearly five times the dividends per share that they saw just five years ago. The shares yield 1.7% today, which compares favorably to the 1.3% yield that they averaged for the 2011 to 2020 time period. Even better, the dividend looks safe as the projected payout ratio is less than 30% for this year. Freeport-McMoRan Freeport-McMoRan is a global leader in the mining of copper, but also produces other precious metals such as gold. The company operates on four continents, producing approximately four billion pounds of copper and two million ounces of gold every year. Freeport-McMoRan is valued at $57 billion and has annual revenues approaching $23 billion. While Freeport-McMoRan is mostly known for its copper mining business and depends on the metal for much of its business, the company counts among its assets the Indonesian Grasberg mining complex. This complex has one of the largest estimated copper and gold reserves in the world, allowing Freeport-McMoRan to benefit from the higher demand for gold. This can be seen in the company's most recent earnings report, released on Oct. 21. Revenue for the company was higher by 58% as copper rebounded to post 22% year-over-year growth. However, it was the 72% improvement in revenue for gold that really drove results. Net income was up four times and adjusted EPS of $0.89 was an 207% increase from the same period of last year. Freeport-McMoRan also has an uneven dividend growth history, much like many names in the precious metal space. The company's dividend was paused in 2014 before being reduced in 2015 and then suspended for the next two years. Last year's lack of demand for copper due to the pandemic resulted in another drastic dividend cut, before investors were rewarded with a 50% increase earlier this year. Freeport-McMoRan yields just 0.8%, far below its average yield of 2.4% over the last decade, but the most recent dividend raise offers a glimpse into what the company can offer shareholders when its business is performing well. Just as important, the annualized dividend is expected to account for just 10% of expected EPS for the year so another dividend cut doesn't appear to be on the horizon. Royal Gold Royal Gold was initially an oil and gas exploration and production company. However, the company switched gears and focused on acquiring and managing precious metal royalties and streams, with a special emphasis on gold by the late 1980s. Royal Gold is valued at $7 billion and had revenue of $616 million in fiscal year 2021 (which ended June 30). The company's royalty and streaming business truly sets it apart from many of the names in the precious metal space. Royal Gold's streaming contracts stipulate that it has the right to purchase all or a portion of metals produced from a mine at a price already determined for the life of the contract. This allows Royal Gold to benefit from high demand, and thus higher production, of gold while limiting downturns in the market when investors have soured on the precious metal. The business model has been worked out well over the years as earnings have been much less volatile than many mining companies. Announced on Nov. 4, the most recent quarter showed that Royal Gold generated a company record $174.4 million of revenue. Adjusted EPS did fall by a third from the prior year, but the company still expects to post one of its best years in a very long time. The consistency of the company's business model has also enabled a rather long dividend growth streak, a rarity among peers. Royal Gold has raised its dividend for 20 consecutive years with payments doubling between 2011 and 2020. The ability to profit from elevated demand for gold while limiting the downside has greatly reduced the uncertainty around the company and its dividend. Royal Gold offers a yield of 1.1% at the moment, with a projected payout ratio for this year is just 30%. Final Thoughts Investing in precious metal stocks isn't for every investor, but these three gold stocks could offer a buffer against inflationary pressures. And, all three stand to gain from any meaningful rise in gold prices. Barrick Gold has a size and scale that is unmatched by most peers while Freeport-McMoRan is more diversified with its gold business acting as support for its main copper business. Royal Gold, on the other hand, appears to have the best of both worlds as it can benefit from an increase in prices, but is contractually protected from steep declines. All three pay a dividend. Royal Gold has two decades of dividend growth, making it particularly appealing for dividend growth.

3 Gold Stocks to Protect Against Inflation

For investors looking for more from their gold positions, such as dividend income, owning shares of companies can be a way to counter inflation.

Columnist Conversation

LIVE EVENT: Chris Versace and "Sarge" Guilfoyle Share Their Stock Market Insights

Watch Doug Kass on the Daily Rundown!

This Weekend On Real Money

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.