The Magnificent Seven might not be so magnificent this year.
Microsoft, Apple, Google, Amazon, Nvidia, Meta, and Tesla were the seven stocks that made up most of the market’s gains last year. The S&P 500 gained 24% in 2023… and the Magnificent Seven were responsible for nearly two-thirds of that increase.
Some of the gains were because of strong earnings growth. But speculators also pushed the prices of these stocks to expensive levels.
At the end of the year, the Magnificent Seven traded at an average of 33x earnings. That’s 65% more expensive than the rest of the S&P 500, which trades at less than 20x earnings.
Steering away from such expensive stocks, some investors are starting to take profits and hedge their bets in a different sector that has quietly beaten the market over the past three months…
Since October, gold has increased 11.6%, beating the 9% jump in the S&P 500. And with an increasingly uncertain economy, demand for the metal could keep rising.
Costco recently reported that gold bars were one of its best-selling items, racking up more than $100 million in sales in the last quarter.
But don’t rush out and buy gold from a store – you could be missing out on a lot of potential profit.
How Best to Profit From Gold’s Price Increase
Most people think that investing in gold means buying coins or bars.
But that’s one of the worst ways to add gold to your portfolio.
When you buy gold coins or bars from a dealer, you instantly lose 3%–10% of the value. That’s because the company you’re buying from has to make a profit. So they mark up the price before they sell it to you.
And when you try to sell gold, you take another hit.
Plus, you’ll have to hold onto the gold in between, which means buying a safe, installing a security system, or paying a company to store it for you.
All those markups and expenses mean it’s hard to make a profit from gold coins and bars, even if the price of gold does go up.
Some investors think the best way to cut out most of the middlemen is to use an exchange-traded fund that tracks the price of gold, like the SPDR® Gold Shares ETF (GLD). Though this ETF has a 0.4% expense ratio, that’s much better than trying to buy and sell gold coins and bars.
But gold, whether in physical form or in an ETF, simply doesn’t pay any dividends.
So what are the other options?
You might think a gold mining company would be a good way to get an income from a gold investment. After all, they’re the ones digging up the gold.
But while gold miners can pay dividends when the price of gold is high, they often reduce their payouts when the price of gold drops. They have to spend lots of money building infrastructure for their mines. Plus, they have to pay for fuel and workers. So their costs go up over time due to inflation, reducing their profits.
Instead, the best way to get a reliable income while diversifying your portfolio with gold is to invest in gold royalties. And one company that focuses on gold royalties is Royal Gold (RGLD).
Gold Royalties with Royal Gold (RGLD)
In exchange for financing gold mines, Royal Gold gets a cut of all the gold produced. And since Royal Gold only has a small team of employees making investments and cashing royalty checks, it keeps most of the money it brings in. The largest gold miner, Newmont Corporation, has margins of 30–40%. Meanwhile, Royal Gold has margins of nearly 80%.
This means that it has more money to invest in new royalties and to reward shareholders with dividends.
Over the past two decades, an investment in Royal Gold has produced more than twice the returns compared to investing in a gold ETF. In fact, Royal Gold has done better than even the S&P 500.
Royal Gold has a portfolio of royalties covering more than 180 properties around the world. And while most of its income comes from gold, it also collects royalties from silver and copper mines as well. That means an investment in the company adds diversification with several different metals.
Royal Gold has increased its dividend every year since 2002. That means it has grown its dividend 23 years in a row. That long dividend growth history is a sign of financial strength and stability
Royal Gold yields 1.4% and trades at 15x cash flow. That’s a 30% discount from its historical average of 22x cash flow.
So now is a great time to add shares and diversify your portfolio.
Happy SWAN (sleep well at night) investing,
Editor, Intelligent Income Daily