Portfolio managers, investors and retirees all have one thing
in common: they need yield. Record low interest rates have made
it difficult to collect stable yield. Moreover, the Fed appears
determined to keep interest rates low for the foreseeable
To compensate for low interest rates, investors have flocked
to dividend stocks. The
SPDR S&P Dividend Index (
is up nearly 10% this year, and it's up 25% since 2012 began.
Though dividend stocks are great investments, they don't often
return double digits - much less 25% - in such time spans.
Investors hold these stocks for modest appreciation and
responsible yield. However, stock performance from within this
sector has outpaced nearly every other group during the past 12
I continue to like dividend stocks, and don't recommend selling
them. At the same time, these stocks are likely overvalued.
However, there is one industry where you can find high yield at
an affordable price. In fact, this industry has the chance to
rise 30% this year.
Market Vectors Gold Miners (
ETF is down 30% since 2012 began and 45% from its 2011 high mark.
In fact, gold miners were one of the worst performing industries
of the past two years.
Despite the period of woes, now is a great time to be adding to
your gold miner positions because these stocks are cheaper than
ever before. The chart below shows that on a price-to-earnings
basis, most of the biggest gold miners are the cheapest they've
been in months and - in a few cases - years.
More importantly, earnings haven't been the driving factor
behind record-low P/E ratios. The low P/E ratios for miners are
mostly, if not entirely, related to the fall in share prices.
Though the P/E ratios declined 25% since last year, most of the
stocks lost 30% to 50% of value. This is a positive sign for
investors because it shows that earnings stability kept the P/E
ratio from declining at a faster rate than share price. And it
indicates that these miners could be undervalued and oversold.
As see in the price performance chart above, Randgold (brown)
is the only stock from the bunch to sport a gain since March
2011. Meanwhile, Barrick Gold (blue), Goldcorp (red), AngloGold
(forest green) and Kinross Gold (lime green) recorded
greater-than-30% declines. In fact, AU and KGC have fallen nearly
50%. So it's no wonder that the P/E ratios for this ragtag bunch
of miners have been halved during the same period, too.
Meanwhile, the Fed expanded their balance sheet at an alarming
rate. The Fed's balance sheet, which is a broad gauge of its
lending to the system, hovered just above $900 billion in
September 2008. It reached $3.1 trillion this February. The
holdings of Treasuries totaled $1.7 trillion while the ownership
of mortgage bonds increased to $1.01 trillion.
Generally, the Fed will add to its balance sheet (increase
assets) to increase the money supply in the system. Inflation
expectations often increase when the money supply increases.
Though we haven't had runaway inflation, it's a risk so long as
the Fed adds to its balance sheet. And even if inflation doesn't
occur, the value of the dollar has already declined, and will
likely continue to do so in future years.
So the Fed is playing a dangerous game by trying to manipulate
the economy through tinkering with money supply. This should
increase the value of hard assets including silver and gold. And
gold and silver miners benefit as silver and gold prices
True enough, the industry has done a miserable job of taking
advantage of rising metal prices during the past few years. In
fact, costs to mine gold have increased 50% (on average according
) in two years while the price of gold increased by only 35% in
Most miners have done a poor job of managing costs, resulting in
sluggish or no earnings growth and causing stock prices to
decline. However, the Fed's actions make this a great industry
for long-term investors because gold prices should increase. Once
mining costs come down, we'll see EPS expand. Gold mining stocks
are also incredibly cheap at current valuations, meaning that now
is the time to buy.
Moreover, some of these miners pay out solid dividends.
Barrick Gold (
), Goldcorp (
), AngloGold (
), Royal Gold (RGLD) and Kinross (KGC)
yield 2.7%, 1.8%, 0.9%, 1.2% and 2%, respectively. Dividend
stocks are unlikely to go out of favor any time soon, but many
could be near the high-water mark. Gold miners have fallen in
recent years, but that decline won't last forever and investors
can collect decent yield from select miners in the interim.