Why Rio Tinto plc Is A Better Income Stock Than RSA Insurance Group plc And Pennon Group plc

Here’s why the dividend appeal of Rio Tinto plc (LON: RIO) exceeds that of RSA Insurance Group plc (LON: RSA) and Pennon Group plc (LON: PNN)

| 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.

When deciding which stocks are most appealing for income-seeking investors, mining companies are usually not included. That’s simply because, historically, their yields have not been as high as those of insurers or utility stocks, for example, but also because their earnings and financial outlook are relatively volatile and open to sudden shocks such as a fall in the price of a key commodity which they produce.

Clearly, Rio Tinto’s (LSE: RIO) (NYSE: RIO.US) appeal as an income stock is hampered somewhat by its large exposure to iron ore. In fact, it relies on the sale of the steel-making ingredient for around 90% of its profit and, as such, is less stable than index peers in other sectors. However, Rio Tinto’s yield, dividend coverage ratio, growth prospects and valuation mark it out as a top notch income stock.

For example, Rio Tinto currently yields a whopping 5.3%, which is among the highest on offer in the FTSE 100. This compares very favourably to the likes of RSA (LSE: RSA) and Pennon (LSE: PNN), which are perhaps viewed as more traditional income plays. They yield 2.6% and 4% respectively, which are a long way behind Rio Tinto’s yield. And, even though both RSA and Pennon are forecast to increase their dividends significantly next year so as to trade on forward yields of 3.6% and 4.3% in 2016, Rio Tinto is expected to do the same and, as a result, should yield 5.5% next year.

Should you invest £1,000 in Pennon Group Plc right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Pennon Group Plc made the list?

See the 6 stocks

Of course, there is more to the income appeal of a stock than a fast-growing, high yield. The sustainability of dividends are also hugely important, since a dividend cut not only means less income for the company’s investors, but can also lead to a significant fall in the company’s share price.

However, on this front, Rio Tinto also impresses, with its dividends set to be covered a healthy 1.3 times by profit next year. Although this is lower than RSA’s dividend cover of 2.2 and is less appealing than Pennon’s coverage ratio of 1.2 (since Pennon is a more stable business, it can pay out a greater proportion of earnings as a dividend and still offer a sustainable income outlook), Rio Tinto can clearly afford its current level of payments. As such, its outlook as an income stock seems to be sound.

Looking ahead, Rio Tinto also offers superb growth prospects alongside a great dividend. For example, its bottom line is expected to rise by 20% next year, versus a rise of 13% for RSA and an increase in earnings of 8% for Pennon. As such, Rio Tinto appears to have a positive catalyst to push its share price higher, while its price to earnings growth (PEG) ratio of 0.7 also compares favourably to RSA’s PEG ratio of 1 and Pennon’s PEG ratio of 2.3.

Therefore, while its profitability may be hit by a fall in the price of iron ore, this appears to be fully priced in, meaning that Rio Tinto is a more appealing income stock than either RSA or Pennon.

Investing in AI: 3 Stocks with Huge Potential!

🤖 Are you fascinated by the potential of AI? 🤖

Imagine investing in cutting-edge technology just once, then watching as it evolves and grows, transforming industries and potentially even yielding substantial returns.

If the idea of being part of the AI revolution excites you, along with the prospect of significant potential gains on your initial investment…

Then you won't want to miss this special report inside Motley Fool Share Advisor – 'AI Front Runners: 3 Surprising Stocks Riding The AI Wave’!

And today, we're giving you exclusive access to ONE of these top AI stock picks, absolutely free!

Get your free AI stock pick

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.

Peter Stephens owns shares of Pennon Group, Rio Tinto, and RSA Insurance Group. 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

How much would an investor need in an ISA for a £100k passive income?

Zaven Boyrazian breaks down how much investors need to put aside each month to potentially earn a six-figure tax-free passive…

Read more »

Concept of two young professional men looking at a screen in a technological data centre
Investing Articles

In my opinion, this FTSE growth stock looks set to soar over the next 5 years!

Our writer thinks this UK growth stock could benefit from the current excitement surrounding artificial intelligence applications.

Read more »

Investing Articles

0.45x EV-to-EBITDA: this is the cheapest UK stock, IMO

This UK stock has come under increasing pressure in recent weeks, but I don’t think it’s warranted. Here’s a closer…

Read more »

Investing Articles

Can the Rolls-Royce share price hit £13 in the coming year?

After a stunning couple of years for the Rolls-Royce share price, can it keep up its recent momentum? This writer…

Read more »

Calendar showing the date of 5th April on desk in a house
Investing Articles

Here’s how a £20k ISA could produce £1,580 of passive income in the next year

A Stocks and Shares ISA stuffed with dividend shares can be a lucrative source of passive income. Christopher Ruane explains…

Read more »

Investing Articles

Prediction: 12 months from now, £5,000 invested in Tesla stock could be worth…

Tesla stock has endured a miserable year so far, falling by 29%. Muhammad Cheema takes a look at how it…

Read more »

Investing Articles

See what £10,000 invested in Tesla shares at their mid-December peak is worth today 

As the world absorbs the full scale of Donald Trump's tariffs, Tesla shares are reeling. Investors who bought the stock…

Read more »

Hand flipping wooden cubes for change wording" Panic " to " Calm".
Dividend Shares

2 ‘safe’ LSE dividend stocks to consider as global markets sell off

As global markets experience high levels of volatility due to economic uncertainty, investors are piling into these ‘safe-haven’ dividend stocks.

Read more »