Gold Miners ETF Becomes A Dividend Idea

With a yield of just 0.39%, the VanEck Vectors Gold Miners ETF GDX doesn't scream "dividend fund," but the largest gold miners exchange traded fund is making some progress on that front.

GDX's dividend yield is poised to rise and not because the fund's price is falling. Rather, some of its largest components have recently unveiled significant dividend increases.

"Gold miners may increase cash returned to shareholders as gold prices rise but should exhibit more caution than in past bull cycles," Fitch Ratings said in a recent note. "Greater discipline around capital allocation and an emphasis on sustainability of dividends when trends are bearish is anticipated, given an emphasis on maintaining financial and operating flexibility.

"Moreover, a focus on improving cost positions and optimizing assets due to declining availability of high-quality assets and growing interest in long-term cash generation should curb widespread shifts in financial strategy."

Why It's Important

Newmont Goldcorp NEM, the largest component in GDX at 11.73% of the fund's weight, started 2020 on the right now, announcing a major dividend hike on Monday.

“Newmont announced a 79% quarterly dividend increase to 25 cents/share on January 6, stating the action aligns with its disciplined approach to capital allocation that entails maintaining an investment-grade balance sheet, investing in profitable growth and returning cash to shareholders,” notes Fitch. “Newmont recently initiated a stock repurchase program of up to $1 billion but is targeting net debt/EBITDA of below 1.0x over time, post its 2019 purchase of Goldcorp.”

Yamana Gold AUY, which accounts for almost 2% of GDX, also recently boosted its payout.

"Yamana recently increased its dividend to five cents/share annually, following a doubling of its dividend to four cents/share annually in July 2019, as part of a gradual and progressive approach to dividend increases," according to Fitch.

What's Next

Last year brought a flood of new assets to gold ETFs as prices climbed and the stage could be set for more of the same this year as interest rates remain and geopolitical tensions run high.

"Higher demand due to gold's countercyclical characteristics and safe haven status along with a modest supply outlook is positive for gold prices, further improving industry cash flow," according to Fitch. "CRU expects the price of gold to average $1,558/oz in 2020, after averaging $1,390/oz in 2019, with total supply of 3,611 tonnes and total fabrication demand of 2,719 tonnes, resulting in a fundamental balance of approximately 892 tonnes."

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