The Best Inflation Hedge for Passive Income
Written by Karen Thomas, MSc, CFA at The Motley Fool Canada
Inflation is coming. In 2022, a myriad of factors are causing economists to sound the alarm bell on inflation. Far from being transitory, this sharp rise in inflation is long-lasting. This should get us thinking about ways to protect our portfolios against inflation. Gold stocks like Barrick Gold (TSX:ABX)(NYSE: GOLD) are the best way to do it. They provide passive income with an inflation hedge.
Simply put, gold stocks like Barrick Gold are a natural hedge against inflation.
Hedge inflation with Barrick Gold stock
You may be thinking, “So what? Money has always been misvalued. Yet gold stocks have lagged. The market continues to rise and thrive. You may also think that inflation has been looming for a long time. Yet gold stocks like Barrick Gold have significantly underperformed. We can no longer ignore this reality of inflation.
The inflation rate in the United States is at its highest level in 40 years. Over time, this inflation will reduce the value of the US dollar. Remember that the value of gold is inversely proportional to the value of the US dollar. This means that we can expect a decline in the US dollar. This, in turn, will cause investors to flock to better stores of value, like gold.
Barrick Gold Stock: The World’s Best-Known Gold Stock
Barrick Gold is one of the largest and best-known gold stocks on the Toronto Stock Exchange and around the world. It has a market cap of $43 billion and is the benchmark stock for gold exposure. Additionally, Barrick’s assets are located around the world. This includes some politically risky and dangerous areas. Thus, Barrick Gold is an established haven in times of trouble. Because gold is a good store of value, this stock of gold should be the same.
But despite the rapid rise in inflation, Barrick Gold stock is outperforming. In fact, it is trading near its 52-week lows. Moreover, even its long-term price chart looks pretty bad. Well, I’m here to say that I think that’s going to change in the next few months. Barrick Gold will take its place as the inflation hedge and safe haven that it is.
In addition to the positive macro environment for gold stocks, Barrick also has many company-specific factors that make it attractive. Once a heavily indebted gold company struggling to move forward, Barrick’s fortunes are improving rapidly. A few years ago, most gold companies were going through a period of rigorous cost cutting. The consistently low gold prices of a few years ago made this necessary. This has translated into significant cash flow growth for the gold mining companies of today and tomorrow. Barrick Gold shares are cheap. It has high margins. And its cash flow increases with the price of gold.
Don’t like Barrick Gold? Look at Agnico-Eagle Mines for passive income
Barrick Gold shares are not for everyone. It owns mines in some politically unstable parts of the world. And the returns to Barrick shareholders are not optimal. Agnico Eagle Mines (TSX: AEM)(NYSE: AEM) has a return on equity above 11% and a rapidly growing dividend yield. Agnico might just be the best gold stock for passive income. If he could get around the fact that he’s lesser known, then we’d have the big winner.
It is less known due to some very differentiating characteristics. For example, Agnico-Eagle limits its operations to safe regions, politically and otherwise. Compared to most other gold companies that operate in many downright dangerous parts of the world, this is a key advantage.
In addition, Agnico-Eagle Mines has one of the best cost structures in the industry. This translated into strong cash flow and strong dividend increases. This is evident in the 8% compound annual growth rate of its dividend over the past five years. This is even more evident last year, when the dividend more than doubled.
Motley Fool: The Basics
Gold stocks like Barrick Gold could very well be the next big players in the market. They protect against rising inflation, effectively protecting your money. They also provide a vehicle for passive income.
The post office Barrick Gold Stock: The Best Inflation Hedge for Passive Income appeared first on Motley Fool Canada.
Should you invest $1,000 in Toronto Dominion Bank right now?
Before you consider the Toronto Dominion Bank, you might want to hear this.
Motley Fool’s Canadian Chief Investment Advisor, Iain Butler, and his Stock Advisor Canada team have just revealed what they believe are the 10 best stocks investors can buy right now…and the Toronto Dominion Bank n was not part of it.
The online investing service they’ve been running since 2013, Motley Fool Stock Advisor Canada, has beaten the stock market more than 3x. And right now they think there are 10 stocks that are better buys.
Stupid contributor Karen Thomas owns shares of Agnico-Eagle Mines. The Motley Fool has no position in the stocks mentioned.