SpaceX Might Go to the Moon. Dividends Pay You Today.

The biggest investment story this week might be SpaceX. The better investment story could be gold.

As investors around the world focus on the excitement surrounding the SpaceX listing, it’s worth asking a simple question:

What actually pays you while you wait?

Speculative growth stories can produce spectacular returns, but they can also produce spectacular disappointments. Whether SpaceX ultimately goes to the moon or not, most investors still need an investment portfolio that generates income today.

That’s where dividends come in.

Dividends still matter

One of the great advantages available to Australian investors is our dividend imputation system. Franking credits continue to make dividend-paying companies particularly attractive for many investors and, importantly, they remain untouched by recent Budget changes.

For small-cap investors, dividends also tell us something else.

They are evidence that a business is actually generating cash and profits.

While exciting growth stories capture headlines, profitable businesses quietly reward shareholders year after year.

Why has gold weakened?

Recently we’ve seen gold come under pressure as markets adjust to the prospect of higher interest rates for longer.

US inflation rose to 4.2% in May, the highest level in three years, while ongoing conflict in the Middle East has pushed energy prices higher.

Gold itself doesn’t produce income, so when interest rates rise, investors often rotate towards assets that do.

The result has been a significant correction, with gold falling almost 30% from its late January highs.

Gold shares have fallen even further

Gold producers typically move more than the underlying gold price because of operational leverage.

A 10% movement in the gold price can produce a much larger impact on the profitability and valuation of mining companies.

As a result, quality producers have experienced much larger share price declines than bullion itself.

Sometimes that’s exactly where opportunity begins.

Why Australian producers are well positioned

Many Australian gold producers operate with costs largely denominated in Australian dollars while selling gold priced internationally. Please read our full gold report in Small Cap Issue 704: Golden Dividends.
Low-cost producers therefore remain well placed to generate substantial cashflow, even during periods of price weakness.

Two companies we’ve liked for some time are Northern Star Resources (NST)

and Evolution Mining (EVN).

Both have traded down to multi-month lows, with Northern Star particularly affected by production issues.

For patient investors, periods like this often create attractive entry points into quality businesses.

The lesson from Regis Resources

Perhaps the best example of the power of cashflow is Regis Resources (RRL).

After years of disappointing performance and operational challenges, the company transformed itself into a significant cash generator.

That improvement allowed management to resume dividend payments and undertake share buybacks.

The result has been exceptional shareholder returns, demonstrating how rapidly sentiment can change when a mining company consistently produces cash.

Income today, growth tomorrow

Growth will always attract headlines.

But for many investors, the combination of capital appreciation and reliable dividend income is a far more powerful wealth-building strategy.

Dividend yields above 4%, combined with franking credits, can provide meaningful cash returns while investors wait for longer-term value to emerge.

That’s a very different proposition from owning a business that may not pay a dividend for many years, if ever.

The bottom line

SpaceX may become one of the great investment stories of the decade.

Or it may not.

Either way, investors still need assets that generate real cashflow.

Sometimes the most exciting opportunities aren’t found in the newest story, but in established businesses producing real profits, paying dividends and trading at depressed valuations.

That’s why we’re continuing to look closely at Australia’s gold producers and the money making opportunities they may offer long-term investors.

Buy cheap. Be patient.