Should You Invest In These Shares Offering 5%+ Yields? Rio Tinto plc, Royal Dutch Shell Plc And Carillion plc

Royston Wild examines the income prospects at Rio Tinto plc (LON: RIO), Royal Dutch Shell Plc (LON: RDSB) and Carillion plc (LON: CLLN).

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Today I am looking at three FTSE plays sporting exceptional dividend yields.

Rio Tinto

I believe that diversified mining goliath Rio Tinto (LSE: RIO) (NYSE: RIO.US) is at huge risk of disappointing income chasers, a view which is at odds with the City’s army of number crunchers.

At present the business is anticipated to lift a 215 US cent per share payment for 2014 to 235 US cents this year, producing a mammoth yield of 5.1%. And for 2016 this is expected to rise still further, to 246 cents, in turn creating a yield of 5.3%. However, I reckon that the scant dividend coverage through this period puts these forecasts at great risk — readings of 1.2 times and 1.4 times prospective earnings this year and next fall well below the security watermark of 2 times.

It is true that Rio Tinto has embarked on massive internal work to bolster its cash pile. In 2014 the company slashed capital expenditure by more than a third, to $8.2bn, and total spend is expected to be maintained at around $7bn until 2017. And in February the company streamlined its production and corporate functions as part of its ongoing cost-cutting drive. But while metals prices keep on dragging as supply/demand balances worsen, I reckon Rio Tinto’s earnings — and consequently dividend — outlook remains under a cloud.

Royal Dutch Shell

Like Rio Tinto, I believe that the problem of worsening commodity market fundamentals threaten to put the kibosh on the bumper dividends currently expected at Shell (LSE: RDSB) (NYSE: RDS-B.US). The black gold behemoth is expected to hike last year’s payout of 188 US cents per share to 191.4 cents in 2015, and again to 191.9 cents in 2016.

Although such projections create a monster yield of 5.9%, if realised these payouts would represent a vast slowdown in Shell’s progressive dividend policy, underlining the huge stress on the company’s balance sheet. The business is taking the hatchet to its exploration budget in a bid to conserve capital, while its asset disposal programme also continues to rattle along — the business has sold $2bn worth of projects since the turn of 2015 alone.

The company’s planned takeover of BG Group is expected to keep dividends chugging along as the latter’s free cash flow is set for take off. But with oil prices expected to languish looking ahead, and dividends covered just 1 times by prospective earnings in 2015, and 1.4 times next year, I believe that payouts could be set to disappoint in the medium term and beyond.

Carillion

Unlike the stocks mentioned above, I believe that Carillion (LSE: CLLN) is a great bet for those seeking juicy income flows. Indeed, the City expects the Wolverhampton firm to raise last year’s 17.75p per share reward to 18.1p in 2015, resulting in a huge yield of 5.6%. And this readout edges to 5.8% for 2016 due to predictions of a 18.7p dividend.

Like the natural resources plays mentioned above, Carillion’s dividend coverage falls below the safety benchmark of 2 times forward earnings. But readings of 1.8 times for 2015, and 1.9 times in the following year, is within touching distance of this target. And I reckon the company’s enviable record of eking out lucrative contract wins with both public and private sector customers is a tremendous omen for future payouts.

Investor nerves were frayed by latest UK construction PMI data last week, which sunk to 54.2 in April, the lowest reading since the summer of 2013. Still, it is worth noting that a figure above 50 still represent expansion, while the recent slowdown can be attributed in large part to postponed spending ahead of the general election. And with the British economic recovery ticking along nicely, I expect shareholder returns to keep stacking up at Carillion.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Royston Wild has no position in any shares mentioned. 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.

More on Investing Articles

Investing Articles

5 steps to start buying shares with under £500

Learn how this writer would start buying shares with a few hundred pounds in a handful of steps, if he…

Read more »

Young happy white woman loading groceries into the back of her car
Investing Articles

The FTSE 100 offers some great bargains. Is this one?

Our writer digs into one FTSE 100 share that has had a rough 2024 to date, ahead of its interim…

Read more »

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

£9,000 of savings? Here’s my 3-step approach to aim for £1,794 in passive income

Christopher Ruane walks through the practical steps he would take to try and turn £9,000 into a sizeable passive income…

Read more »

Group of young friends toasting each other with beers in a pub
Investing Articles

I’d buy 29,412 shares of this UK dividend stock for £150 a month in passive income

Insiders have been buying this dividend stock, which offers an 8.5% yield. Roland Head explains why he’d choose the shares…

Read more »

Red briefcase with the words Budget HM Treasury embossed in gold
Investing Articles

Could the new UK budget spell growth for these 6 FTSE stocks? I think so!

Mark David Hartley considers six UK stocks that could enjoy growth off the back of new measures announced in the…

Read more »

Investing Articles

With a 6.6% yield, is now the right time to add this income stock to my ISA?

Our writer’s looking to boost his Stocks and Shares ISA. With this in mind, he’s debating whether to buy a…

Read more »

Dividend Shares

This blue-chip FTSE stock just fell 12.5% in a day. Is it time to consider buying?

Smith & Nephew is a well-known, blue-chip FTSE stock with a decent dividend yield. And its share price just dropped…

Read more »

Investing Articles

At 72p, the Vodafone share price looks to be at least 33% undervalued to me

Our writer looks at a number of valuation measures to determine whether the Vodafone share price reflects the fair value…

Read more »