Silver Wheaton (NYSE: SLW) is relatively new to paying dividends, and its recent yield, near 1.1 percent, isn’t the most compelling. But the company has a solid chance of upping it considerably.
Mining companies are one of the last sectors you’d think of when it comes to dividends and value, but Silver Wheaton can give you a hefty dose of both. It isn’t a traditional miner. Instead, it enters into long-term contracts with silver miners, agrees to purchase their silver at a discounted rate, and then pockets the difference. Nearly all of Silver Wheaton’s contracts have the company paying between $4 and $5 per ounce, which allowed it to crank out gross profit margins in excess of 80 percent last year.
While many love gold, silver has more practical uses. It’s an essential component in many of today’s popular electronic products, and is also a crucial element in jewelry, superconductivity and water purification.
Silver Wheaton has almost double what its closest peers have in proved and probable reserves, with 798 million ounces. Based on recent silver prices, the company is sitting on roughly $25 billion worth of reserves.
The company tied its dividend to its operating cash flow last year and tripled its previous quarterly stipend from $0.03 to $0.09. With its costs fairly predictable, Silver Wheaton’s dividend should continue to move significantly higher.
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My dumbest investment
Back in the late 1980s, I bought some shares of networking giant Cisco Systems when the price dropped from about $9 per share to $4. It immediately dropped further, to $2 per share, and I sold in order to preserve my capital. Then Cisco went on a tear, with its stock price surging and splitting about eight times over the next 10 years. I could have retired on that stock had I held on. – C.P. Henderson, Nev.
The Fool responds: It’s important to not just look at numbers. Any stock plunging can keep plunging – or it could rebound sharply. It all depends on what the company does, its business model, its competitive position, its financial health and the skill of its management, among other things.
When a stock drops, determine whether it’s facing a short-term problem (it was overvalued, for example, or posted poor earnings due to oversupply) or a long-term one (its technology has been eclipsed by a competitor’s or has become obsolete). Look for great companies and aim to buy them when they’re undervalued. (The Motley Fool owns shares of Cisco.)