I don’t think I have ever suggested buying a company when it has risen nearly 50% in three months. Average investors typically hop on board a stock that is doing amazing with the mentality that it can never go down. And then it usually does, costing those investors a lot of money. But I believe Silver Wheaton Corp. (TSX:SLW)(NYSE:SLW) is an exception to that rule right now.
How Silver Wheaton makes money
Silver Wheaton doesn’t actually run its own mines. Instead, it works with new mines that need upfront cash. Silver Wheaton writes a check to those mines in exchange for a future amount of gold and silver. These mines are typically for other metals, such as copper, so they don’t mind selling the gold and silver at really discounted prices. It reduces risk for the mine since someone else is financing the operation and it increases profitability for Silver Wheaton because it gets the resource at insane prices.
What makes this business model really great is that miners are desperate for money. The bond market is awful. Issuing equity is no good because it would dilute an already beaten-down stock. Therefore, in comes Silver Wheaton to provide funding and these new mines eat it up.
In its Q3 2014 earnings report, Silver Wheaton revealed that it had had an average silver cost of $4.16 per ounce. It also revealed that its average gold cost was $378. Now that the price of these metals appear to be rising, the profits are going to be great.
Solar energy pushing demand
While the company does have some gold, it predominately buys silver. According to the Silver Institute, demand for silver will rise to nearly 680 million ounces by 2018. That’s a 27% increase from 2013 levels. That increase in demand is going to send the price of silver much higher, which Silver Wheaton is going to gain from.
What’s interesting is that a lot of this silver will be needed for the solar industry. It is an important component in solar panels and with many countries around the world realizing they need to invest in clean energy, the demand for the silver needed to make the solar panels will only rise.
Silver is also used in many other industrial components, so the demand isn’t likely to wane.
Buy Silver Wheaton
I would recommend buying the company, not the resource. Resources just sit there while companies innovate and grow. Further, Silver Wheaton pays a small dividend (0.91%), so at least your investment will accrue a little income for you. And historically, Silver Wheaton has outperformed the raw resource, so investors can make quite a bit more buying the company.
But here’s the thing. Silver Wheaton is a great company to buy and I don’t believe you can do wrong by it. But it’s not the best company. And while getting any dividend is better than nothing, it’s not the best dividend.
The Motley Fool has a stock that I think you’re going to love that will definitely pay you a sweet dividend.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Jacob Donnelly has no position in any stocks mentioned. The Motley Fool owns shares of Silver Wheaton. Silver Wheaton is a recommendation of Stock Advisor Canada.