One of my favorite ways to hedge against an uncertain market environment is to look for gold stocks that have high dividend yields and reliable asset bases.
The S&P 500's volatile year-to-date trajectory suggests that the market remains in uncertain territory. Moreover, salient macroeconomic features imply that the storm has yet to abate as risk factors such as a potential banking crisis, resilient inflation and inverted yield curves persist.
With the current market environment in mind, let's take a look at two of my favorite high dividend paying gold mining stocks that I believe present favorable risk-adjusted return prospects.
DRDGold Ltd
DRDGold Ltd (DRD, Financial) is a South African gold mining company that trades in the U.S. via American depository receipt. DRDGold's underlying operations consist of gold production and tailings procedures, allowing the company to run a low cost business model. Tailings is a highly lucrative business due to the cost benefits involved. In addition, DRDGold is well positioned to benefit from booming gold prices with little exposure to South Africa's current energy crisis.
The company released its half-year results in February, revealing a 6% year over year surge in revenue stemming from an 11% increase in realized gold prices. More importantly, the company's operating profit margin remained firm at 29.9%, allowing it to pass along a $0.11 half-year dividend to its shareholders.
It is highly probable that DRDGold is set to deliver robust results in the next few quarters in my opinion. Firstly, the company is in line to benefit from rising gold prices and curtailing fuel and wage expenses. On top of that, DRDGold has a few catalysts that could play a big part, including developing a solar facility to insulate its refineries against an Eskom crisis and reclamation of two key operating sites, namely Elsburg and Van Dyk.
As things stand, DRDGold looks like a growth stock, as shown by the company's three-year Ebitda compound annual growth rate (CAGR) of 59.4%. In addition, DRDGold provides its investors with a sound dividend, as illustrated by its dividend yield of 3.4% and its five-year yield-on-cost of 3.46%.
Gold Fields Ltd
In contrast to DRDGold, Gold Fields Ltd (GFI, Financial) is a mature mining company that primarily mines underground properties in Australia, Ghana and South Africa. The stock has surged by over 60% in the past 12 months, driven by higher gold prices and better-than-anticipated production results.
The company mines most of its resources in Australia via the Gruyere asset. During the past year, Gold Fields' regional production surged by 4%, and an enhanced weather outlook means further production increases are likely en route.
Furthermore, the company's South African operations are in splendid form as Gold Fields' latest financial results showed that its South Deep mine's production rose by 12% year over year. In a nutshell, regional results are being driven by sustainable throughput and high grades, which are expected to continue throughout 2023.
Another interesting feature of Gold Fields is its exploration pipeline. For example, the company is in the process of starting production in Chile via the Salares Norte Gold-Silver mine. The mine is expected to produce its first ounces in late 2023, with its mine plan estimating an annual output of 450,000 ounces. Salares Norte will add tremendous value to Gold Fields' balance sheet as its open cast features and high grades suggest that lucrative profit margins are possible.
Despite the company's impressive performance, its price-earnings ratio is on the high side for a cyclical upswing at 17.28. However, in my opinion, the stock has the potential to sustain its momentum as long as the U.S. yield curve remains inverted because investors will likely continue bidding up the price of gold. Moreover, Gold Fields is set to benefit from tapering fuel costs and a softened labor market, allowing the company to produce wider profit margins.
Furthermore, the stock's total return prospects remain bright as its dividend yield of 3.09% is accompanied by a three-year tangible book value CAGR of 20.9%.
Noteworthy risks
Investors should recognize that gold mining stocks are exceptionally volatile. Thus, their risk-off properties might, at times, be counteracted by higher than average standard deviations. The primary reason for this is their cyclical attributes stemming from wild price swings in the precious metals space.
Another aspect to consider is that both DRDGold and Gold Fields are exposed to South Africa's electricity crisis. In addition, Gold Fields is tangled up with systemic risk in Ghana amid widespread civil unrest and governmental concerns.
Final word
Dividend-paying gold mining stocks present a shield against an uncertain stock market environment, as investors tend to retreat to the safe haven asset in times of crisis.
DRDGold and Gold Fields possess tremendously attractive total return prospects in my view given their operational prowess and dividend profiles. Although valuation concerns are present, I believe the good outweighs the bad.
