One month, Chinese factory output looks good and mining shares rise; the next, output is weak and mining shares fall.
Does such a fickle business sound like a good one for novices? Well, with a few caveats, I’d say yes. And today I want to tell you why I think Rio Tinto (LSE: RIO) (NYSE: RIO.US) is a good investment, even if you’re just starting out — and as it happens, it’s a constituent of the Fool’s Beginners Portfolio.
Couldn’t be easier
Rio Tinto digs up iron, aluminium, copper, nickel, gold, uranium, molybdenum, diamonds, coal… and more. And it sells it to people who use it to make stuff. How could a business be any easier to understand?
And look at those products. They really are the archetypal raw materials without which modern humanity could not survive — they’re almost as important as food and water. Demand going to fall in the long term? Not without global economic collapse it isn’t, and if that happens we’d be in much bigger trouble than worrying about the price of our shares.
Rio Tinto’s operations are just about as global as they come, too. It has a hand in production in the UK, Europe, Australia, North and South America, Africa, Asia — about the only place it doesn’t have mines is Antarctica. So there’s little geographic risk. And that extends to sales, too — as long as there’s industry happening somewhere on the planet, Rio Tinto will be selling its stuff.
Recent wobbles
Ah, but what about today’s hard times, you might wonder.
And you’d have a point — although the share price is up from the depths of 2009, it still hasn’t regained its pre-crash levels. But how long is your investment horizon? If you’re just starting out, I reckon you should be looking at 20 years or more — and since 1995, the Rio share price has risen almost four-fold.
Now, even that’s not a great performance, but it beats inflation hands down — £1 in 1995 would be worth around £1.65 now. And then there are dividends. They vary, with a yield of 5.6% in 2008, slashed to 1% in 2009, then back up to 3% by 2011. This year we’re on a forecast yield of 3.7%, rising to 4% based on 2014 predictions.
Overall, that’s adding up to a pretty decent return — with very low long-term risk.
The caveats
So is this for you as a novice? Well, there are those caveats I mentioned earlier, and I’ve already covered one — you have to be in it for the long term. I’d say it’s no good buying Rio Tinto shares if you’re looking for anything as short as a five-year investment, because economies go in cycles, and commodities like metals and minerals go with them.
And as a corollary, you need to be prepared to handle falls for several years in a row from time to time, because that’s just what happens in this industry. But the good thing is that the down spells are not that far down — not compared to, say, a crashing technology share. And such down times are almost guaranteed to come back up again — as long as the industrialised world keeps turning.
As they say, where there’s muck…
