Popular commodities such as gold and oil are often on investors’ radars. Gold is a precious metal and has been used as a currency for thousands of years. Moreover, its global appeal has meant gold is viewed as a store of value and a hedge against inflation. On the other hand, oil fuels the modern economy and remains an attractive opportunity despite the worldwide shift towards clean energy solutions.
You can gain exposure to these commodities by investing in companies that mine gold or produce, transport, and store oil. However, investing in mining stocks or oil producers can be quite tricky as you need to consider factors such as production levels, commodity cycles, and expansion capabilities.
In this article, I aim to explore this investment landscape so that you can decide which is a better investment for your equity portfolio in 2024.
Investing in gold mining stocks
Gold mining companies mine, extract, and sell gold. However, Canada also has a few gold streaming and royalty companies that provide financing to legacy miners to extract gold for a percentage of these revenues.
Investors should understand that they are investing in a business and not in a commodity. So, it’s essential to identify companies with steady cash flow margins, low debt, rising production levels, and sustainable operating costs.
One such Canadian gold miner that ticks most boxes is Barrick Gold (TSX: ABX). Valued at a market cap of $32 billion, Barrick Gold is among the largest gold mining companies globally. In the last 15 months, geopolitical tensions and an uncertain economy have driven prices of the yellow metal higher by 15%, confirming its status as a safe-haven asset. However, Barrick Gold and its peers are trailing the performance of gold, making the stock a top investment choice right now.
Barrick confirms that it is positioned to grow its copper and gold production amid higher prices, amplifying its profit margins in a rising commodity market. Priced at 16.2 times forward earnings, Barrick Gold stock is quite low, given its earnings are forecast to grow by 30% annually in the next two years. In addition to its cheap valuation, it also offers you a dividend yield of over 2%.
Investing in oil stocks
Oil stocks such as Suncor Energy (TSX: SU) are more mature than gold stocks. Valued at $67 billion by market cap, Suncor Energy pays shareholders an annual dividend of $2.18 per share, indicating a forward yield of 4.2%. Suncor is an energy heavyweight that sells oil and natural gas. It also owns and operates gas stations under the Petro Canada brand name.
In the first quarter (Q1) of 2024, Suncorās oil sands revenue stood at $6.9 billion while its operation cash flow grew 5.5% to $3.2 billion, indicating a margin of almost 50%.
A high cash flow margin allows Suncor to consistently raise its dividends each year. In the last 20 years, Suncor Energy has increased its dividends by 15.6% annually, showcasing an ability to thrive across market cycles.
Oil stocks seem to be a better investment choice for investors as these companies are more established than gold miners. This results in higher dividend yields and a steady expansion of these payouts.
