Find Gold in Dividend-Linked Miners

As fiscal and economic worries continue to plague the globe, investors have flocked to gold in spades. A variety of both institutional and retail investors now count the precious metal among their portfolio holdings, and the SPDR Gold Shares (NYSE:GLD) has amassed record assets.

With all this new-found investor attention, gold prices surged to record highs throughout the year. That is, until the bottom dropped out a few weeks ago. Now, with gold prices sitting around $1,600 per ounce, opportunities exist for investors wanting to play the sector. One big opportunity can be found in the firms that dig the yellow metal out of the ground.

A Big Bet on the Miners

Gold mining stocks often are touted as a way to gain additional leverage from the price of gold. Because of the miners’ generally fixed production cost structure, a 1% increase in the price of gold often will equal a greater than 1% increase in their operating income. For example, if a mining company has a profit margin of around $200 when an ounce of gold is trading at $1,000, a 10% increase in gold prices will result in an operating margin increase of more than 50%. These nuances give the gold miners a unique risk/return profile relative to physical gold prices.

As gold has risen to record levels, a variety of mining firms have been reaping record profits. With many top-tier mining firms being able to pull gold out of the ground for less than $500 an ounce, the remaining spread between is all profit. Now, more firms are starting to return that profit to shareholders. The Financial Post reported in November that dividend payments from miners are up 75% in 2011, compared with a 26% increase in 2010. Analysts forecast that 2012 will see another 26% increase in distributions.

Perhaps the biggest game-changer for the gold miners stems from the recent decision of several miners to link their dividend policies directly to the price of gold. With some market pundits and analysts calling for gold prices of $2,000, $3,000 and even $5,000 per ounce in the near future, the dividend potential is enormous. However, while the long-term reasons to be long gold (fiscal uncertainty, inflation, etc.) still are there, many of these dividend-linked miners have fallen hard as gold prices have tanked — the thought being that dividend payouts would decrease with falling prices.

For forward-thinking investors, the opportunity to pick up some future yield is huge.

Panning For Opportunities

Investors might not have to look far for an interesting bet on golden dividends. As the world�s second-largest producer of gold, Newmont Mining (NYSE:NEM) was the first to introduce gold-linked dividends earlier this year and plans on increasing its dividend for every $100 rise in gold prices. Newmont�s share price has been drifting lower thanks to gold�s recent price drop, along with problems at a Peruvian mine. NEM shares now can be had for about $10 below their 52-week high and trade at a forward P/E of just 10. Newmont currently yields around 2%, but analysts estimate that if gold returns to the $1,850 range, shares of the miner will yield a delicious 3.1%.

Similarly, Eldorado Gold (NYSE:EGO) has seen its share price decimated in the wake of falling gold prices. However, like Newmont, the firm recently has pegged its dividend to gold and has continued to make strong moves to increase supplies. Eldorado is expected to increase its next dividend payout by 67%.

For investors looking for dividend opportunities in the �poor man’s gold,” Hecla Mining (NYSE:HL) has linked its distribution policy to the price of silver. Dividends declared by the firm will increase or decrease by 1 cent per share for each $5 per ounce move in the average realized silver price. Featuring both precious and industrial properties, analysts predict silver demand will increase faster than gold. Hecla currently yields 1.5% and is about 50% below its 52-week high.

Despite the recent stumble, analysts predict higher gold prices on the horizon. That will benefit investors in miners, especially those that have linked their dividend policies to gold prices. The battered trio of Newmont, Eldorado and Hecla not only represent good bargains, but solid long-term income opportunities.

As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities but is long the iShares Gold Trust (NYSE:IAU).