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Beware the Forbidden Fruit of Dividend Gold Miners

Commodities / Gold & Silver Stocks Sep 23, 2010 - 11:00 AM GMT

By: Dr_Jeff_Lewis

Commodities

Beware the forbidden fruit.  As precious metals begin to see vast improvement in the prices of gold and silver across the board, greed is setting in.  Why should you hold physical metals when stock miners provide the same upside potential as miners – and pay a dividend?


Dividends and Securities

When you purchase a share of stock, even in a gold miner, you're buying a company more so than the assets.  This means you're buying the collective value of the employees, the capital equipment, the debt and assets, including the land and the precious metals still in the ground.  Keen businessmen, not investors, are seeing an opportunity to increase their shareholder value (read: increase the price of their stock relative to assets) by increasing their annual dividend yields. 

Investors often consider the dividend yield when purchasing a security.  A high dividend yield means the stock will face less downward pressure since investors can get higher yields with their dividend stocks than most safe fixed income investments.  Also, higher dividends mean that investors can roll their dividends over, and in time, increase the percentage of the company that they own.  However, this is a poor argument.

Capital Drawdown

One of the biggest problems that all high-dividend companies face is capital drawdown.  That is, they send out payments to stockholders instead of reinvesting their earnings to maintain growth.  For example, a company may have $15 in gold in the ground for every $10 share of stock.  If the company pays out a $1 dividend each year, it will only be 15 years until the gold reserves are wiped out and the company is essentially worthless. 

A gold miner, of course, can't generate an income without gold in the ground.  In the example above, after 15 years locked into the gold stock, an investor would have made only $5, a paltry 50% return that in no circumstances would outpace the rate of inflation over 15 years.

Safety and Security

Disagree with the math, you might, but there is no way to argue with the inherent safety of bullion ownership that a gold miner could never match.  A gold miner company can go bankrupt.  Its workers could go on strike, the company could invest in a poor yielding mine, etc.  When a company goes bankrupt, you, as a stockholder, are the last in line to be paid.  Very rarely do shareholders ever recoup any of the investment, never mind recouping all of their investment.

For that reason, investment in true hard metals, meaning those that you can hold in your own hand, provide the best security and opportunity for capital appreciation.  You don't have to worry about the operations and efficiency of a company run by others, and you don't have to worry about other's poor investments.  You have the full ownership and control of your own destiny, and you have the gold and silver in hand to prove it.  While others are staring at gold and silver miners with wide eyes thinking about their overnight millions, know that your investment in precious metals is secure and in your own hands, not in the hands of others.

By Dr. Jeff Lewis

    Dr. Jeffrey Lewis, in addition to running a busy medical practice, is the editor of Silver-Coin-Investor.com and Hard-Money-Newsletter-Review.com

    Copyright © 2010 Dr. Jeff Lewis- All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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