When it comes to dividends, big companies aren’t always better than small ones. In today’s article I’ll compare the latest results from South African gold miner Pan African Resources (LSE: PAF) with those of Aussie giant BHP Billiton (LSE: BLT). Which stock has more to offer income investors?

Positioned for further gains?

Net profit rose by 118% to £25.5m at Pan African Resources during the year to 30 June. The South African firm delivered record gold production, with gold sales up 16.5% to 204,928 ounces.

Earnings per share rose by 120.3% to 1.41p, while the dividend has been increased by 55% to 0.82p per share. This gives Pan African stock a trailing P/E of 13.5 and a dividend yield of 4.3%. This looks very reasonable to me, especially as the average gold price received by the firm last year was just $1,164/oz.

Gold has remained above $1,300/oz. since the end of June, so assuming the market remains stable, the average price received by Pan African should rise significantly this year. What’s less predictable is the effect that exchange rates will have on the firm’s profits.

Pan African operates in South Africa, so the majority of its costs are in Rand. But gold sales are in US dollars and the company’s reporting currency is the pound. The interplay between these exchange rates and the price of gold can have unpredictable side effects. For example, while Pan African’s all-in sustaining costs fell by 20% last year when measured in dollars, they were largely unchanged when calculated in South African Rand.

As things stand, I believe Pan African’s profits are likely to rise this year. Analysts are forecasting earnings of 3.1p per share and a dividend of 0.89p per share for 2016/17. These figures would give the shares a forecast P/E of 6.2 and a yield of 4.6%. This seems cheap enough to offset the risks involved, so I’d be happy to buy.

A safer prospect?

Localised issues can have a big impact on small miners like Pan African. That’s why I tend to focus on larger and more diverse mining groups like BHP Billiton in my own portfolio.

BHP’s profits are rebounding strongly from last year’s lows. Underlying earnings are expected to rise by 150% to $0.56 per share this year, with a further 28% gain pencilled-in for the following year. These figures give BHP shares a forecast P/E of 24 for the current year, falling to 19 next year. The figures may seem high but they don’t reflect BHP’s current ability to generate cash.

BHP generated free cash flow of $3.4bn last year, significantly more than its underlying profit of $1.2bn. This trend is expected to continue this year, when free cash flow is expected to rise to $7bn, versus forecast profits of $2.8bn.

This free cash flow is being used to fund the firm’s growing dividend and reduce debt. Based on the firm’s guidance for the current year, BHP shares trade on just 10 times free cash flow. That’s very cheap for a large, profitable company.

Backed by free cash flow, BHP’s dividend yield is expected to rise to 2.7% this year, and to more than 3% during 2017/18. I believe the shares remain a strong buy.

Don't ignore this income stock!

Mining dividends are rising, but many remain significantly lower than they were before the mining downturn.

Our experts believe they've identified a company with much stronger income credentials than BHP or Pan African. They've named this firm A Top Income Share From The Motley Fool and believe it could be significantly undervalued at current levels.

You can find full details of this potential bargain stock in our exclusive new report.

It's FREE and carries no obligation, so there's no reason for you to miss out. To download your copy today, just click here now.

Roland Head owns shares of BHP Billiton. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.