Why a master income investor just made a recommendation based on an asset that yields zero
Capital gains are wonderful, but most of us have a soft spot for an investment paying a juicy yield.
After all, that big capital gain in your portfolio is unrealized. Unless you’re willing to sell the asset, you can’t use your gains for a new car, a vacation, or perhaps a down-payment on a home.
But a great income investment that deposits hundreds or thousands of dollars into your account every few months? That can make a real difference in your day-to-day life.
So, how would you like a basket of high-quality investments yielding 8.5%?
That was the average yield of Neil George’s 10 highest-yielding stocks, bonds, and funds over the first half of 2019 from his Profitable Investing portfolios. Topping that list were MFA Financial at an 11.1% yield, and Hercules Capital at 10.06%.
These lofty yields from quality investments aren’t easy to find in today’s low-rate environment. For context, the current yield of the S&P 500 is 1.87%, which isn’t all that far off its all-time low of 1.11%, set back in August 2000.
I’m browsing Neil’s portfolio as I write, noticing forward yields of 5.73% … 6.09% … 7.80% … 8.85% … 9.85% … 11.07% … Bottom line — Neil is a master income investor, able to find high-quality yield even in tough, yield-starved markets.
That’s why one of his most recent recommendations jarred me …
You see, Neil just recommended something that most people would never expect from an income investor. That’s because the underlying asset yields … nothing. It’s about as far from an income investment as you can get.
I’m talking about gold.
Yet, somehow, a gold-related investment just found its way into Neil’s portfolio.
Personally, I believe there’s a strong case to be made for a longer-term rally from the precious metal. But when even an income investor is interested, that jumps out at me.
So, today, let’s look at gold through Neil’s eyes. On Tuesday, he shared his thoughts on the tailwinds behind gold with his Profitable Investing subscribers. Given his income and interest rate-oriented background, it’s a valuable prism through which to analyze the precious metal.
Best of all, I get to reveal which gold-related investment Neil likes. And though gold itself yields nothing, Neil’s pick pays a dividend. So, you get exposure to gold’s tailwinds while enjoying some mailbox money in the meantime.
Let’s get into the details.
***”I have never recommended gold or gold stocks — ever — until last month when I made my initial case for the metal”
That’s how Neil’s most recent Journal update begins.
As to why, Neil points toward gold’s lack of yield, as well as the costs related to adequately storing the precious metal in a safe, protective place.
But then he shifts gears:
To justify buying and owning (gold), there have to be good reasons for prices to rise above those costs. And I think there are good reasons right now.
As to those reasons, Neil starts by pointing toward the value of the U.S. Dollar. You see, since gold is priced in dollars for U.S. investors, if the dollar increases value — all things being equal — fewer dollars are needed to buy the same amount of gold. This puts downward pressure on gold’s market price.
Of course, the opposite is true as well. If the dollar is weakening, it requires more of them to purchase the same amount of gold. This pushes gold higher.
Meanwhile, interest rates also play into this dynamic. Neil echoes a point we’ve made before in the Digest — namely, rising interest rates make income investments more attractive than gold, which pays nothing. So, a rising rate environment is a significant headwind for gold.
Here again, the opposite dynamic is generally true — falling interest rates are bullish for gold. That’s because lower rates reduce the opportunity cost of picking an income investment instead of the precious metal.
Here’s Neil on this interplay between the dollar, rates, and gold:
The U.S. dollar has been generally stronger against most of the major commercial and financial currencies of the world … The dollar as measured by this index is up by 1.18% over the trailing year, largely with U.S. stock and bond demand, along with higher effective interest rates in short-term investments.
But that is coming to an end, as the FOMC has made it clear that the policy has not been justified by inflation in the U.S. It is now likely that the FOMC will be easing and bringing interest rates lower.
This should have two impacts on gold.
First, lower interest rates in the U.S. mean that the yield advantage of holding dollars versus other currencies will subside, bringing down the U.S. dollar overall. A lower dollar will help the price of gold in dollar terms.
Second, lower interest rates in the U.S. will reduce the opportunity costs of holding gold, which will help the price of the metal.
***The gold/dollar chart shows the relationship between interest rates, the dollar, and gold’s price
Neil points us toward a chart of gold and the dollar, noting that during last year’s FOMC tightening the dollar was stronger while gold was lackluster. That was until the fourth quarter when stocks fell which reduced the opportunity cost of holding gold.
Below is a chart from Tuesday’s update. Note the inverse relationship between gold and the dollar index — especially about four weeks ago when gold soared.
***Neil points toward several other bullish tailwinds behind gold
Among them are deteriorating conditions in Europe, which is showing little progress in its core economies and faces many political headwinds. Even better for gold, in key European markets, interest rates are in negative ranges, with depositors paying rather than receiving interest.
Beyond the ECB, Japan, Switzerland, Sweden and Denmark have also gone negative.
For additional tailwinds, Neil notes China’s slowing economy, trade tensions, and political uncertainty here in the U.S. as the 2020 election gets closer (gold tends to perform well during periods of uncertainty). All of this is bullish for the precious metal.
***So, how is Neil playing it?
He begins by telling us what he didn’t want to recommend — namely, one of the most popular ways to own gold, which is SPDR Gold Shares(GLD). As to why, Neil references its annual operating expense of 40 basis points (0.40%), and the fact it doesn’t pay a penny in dividends.
Instead, Neil found what he calls a better way to buy and own gold — one that pays you along the way. What is it?
Franco-Nevada Corporation (FNV).
Unlike most gold-related investments, Franco isn’t a mining company. Instead, it acquires and holds royalty interests from gold producers and owns proceeds from gold mining companies.
This means that it doesn’t have to buy and run mines or deal with the related expenses that bring a whole lot of costs and uncertainty to other gold businesses.
It just collects cash from gold production as it streams into the market. If gold goes higher in price, the company makes more revenue. If gold goes down in price, the company makes less, but it still makes money.
And it pays its shareholders their cut of the profits from the stream of gold flowing across its books.
As I write, FNV’s dividend yield is around 1.1%. While that may seem low compared to Neil’s Q1/Q2 top-10 average of 8.5%, remember, FNV isn’t supposed to be a traditional income investment. Rather, it’s a way to get exposure to the gains that are likely in store for gold — while getting paid along the way.
Plus, keep in mind, when gold does well, FNV usually does better.
Franco-Nevada stock is proving out to be the better way to own gold. Since Sept. 11 of last year to date, FNV has generated a total return of 46.58% against GLD’s 17.36% return — a 168.32% better return.
Over the past five years, FNV has outperformed GLD by a total return margin of 897.97%.
Leave it to a master income investor to find a way to get paid from a gold-related investment that’s simultaneously crushing gold’s actual gains.
For more on FNV from Neil, or if you’re a fan of mailbox money and want to learn more about his other high-yielding income investments, click here. After all, if the Fed is cutting rates in a couple weeks, an average 8.5% yield is going to be hard to come by.
In the meantime, keep your eyes on gold. It popped over 1% yesterday, and is back to testing the resistance points of the six-year-highs it made in late June. As I write Thursday morning, it’s trading at $1,425.
We’ll continue to keep you informed.
Have a good evening,