Are These High-Yielding Shares Dividend Traps? Rio Tinto plc, Glencore plc, Aberdeen Asset Management plc & Ashmore Group plc

Rio Tinto plc (LON:RIO), Glencore plc (LON:GLEN), Aberdeen Asset Management plc (LON:ADN) and Ashmore Group plc (LON:ASHM) have dividend yields of 5% or more.

| 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.

High dividend yields are tempting to income investors, but they could also be a sign of potential dividend cuts. To differentiate between the value plays from the dividend traps, investors need to look at the sustainability of dividend payments.

Common methods of assessing sustainability include using earnings and free cash flow coverage ratios. But it is also important to look at the strength of the companies’ balance sheets, their longer-term fundamentals and underlying sector trends.

Rio Tinto

Rio Tinto (LSE: RIO) currently pays a dividend yield of 5.8%. Of the large mining companies, Rio has the best earnings and free cash flow coverage ratios. Its 2015 dividend should be covered by 1.1x earnings, but its free cash flow shortfall is expected to be at least $2 billion this year.

Should you invest £1,000 in Banco Santander 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 Banco Santander made the list?

See the 6 stocks

With a net debt to underlying EBITDA ratio of 0.64x, Rio also has one of the strongest balance sheets in the industry. The company’s low level of indebtedness means it can absorb the shortfall in free cash flow even if commodity prices fall further. But, with growing excess supply situation in the iron ore market, the outlook for iron ore prices is very unattractive. Even though Rio may cope with lower iron ore prices over the medium term, low iron ore prices could persist for even longer.

Glencore

Glencore (LSE: GLEN), the diversified miner and commodities trader, has attractive exposures to base metals. The outlooks for copper, nickel and zinc are better than those of other commodities, because demand growth is expected outstrip supply growth in the medium term.

Glencore currently has a dividend yield of 5.6%. Its 2015 dividend is just about covered by its projected earnings. With stable cash flow generation from its commodities trading business and cuts to its capex plans, Glencore should also have no shortfall in free cash flow in 2015. Nevertheless, we may not have seen the bottom for Glencore’s shares, as commodity prices could fall further with slowing growth in China.

Aberdeen Asset Management

Aberdeen Asset Management (LSE: ADN) has a current dividend yield of 5.1%. Analysts expects its dividend will grow by 9% this year to 19.6 pence, from 18.0 pence in 2014. This implies prospective dividend yield of 5.4%. For 2015, estimates suggest its dividend will be covered by 1.6x earnings, and free cash flow cover of the dividend is projected to be 1.7 times.

Despite recent net outflows from Aberdeen, the outlook for the asset management industry is very optimistic with the introduction of the government’s pension reforms. Asset managers stand to gain from higher retail cash inflows as pensioners are no longer required to purchase annuities.

Ashmore

Ashmore Group (LSE: ASHM) pays a higher dividend yield of 6.1%. Its earnings and free cash flow coverage ratios for 2015 are projected to be 1.2x and 1.3x, respectively.

Like Aberdeen Asset Management, Ashmore also has a heavy exposure to emerging market assets. Although emerging markets are likely to stay out of favour with investors in the near term, the worst of the net outflows seems to be over. In the longer term, Ashmore’s long-term track record with managing emerging market investments should reward the company when investments flow back into emerging markets.

Conclusion

Because of the better longer-term fundamentals for the asset management industry and stronger dividend coverage ratios, Aberdeen Asset Management and Ashmore Group seem to be resemble value plays. Although Rio Tinto and Glencore’s dividends seem secure in the medium term, the weak outlook on commodity prices could mean their shares have further to fall.

Should you buy Banco Santander shares today?

Before you decide, please take a moment to review this first.

Because my colleague Mark Rogers – The Motley Fool UK’s Director of Investing – has released this special report.

It’s called ‘5 Stocks for Trying to Build Wealth After 50’.

And it’s yours, free.

Of course, the decade ahead looks hazardous. What with inflation recently hitting 40-year highs, a ‘cost of living crisis’ and threat of a new Cold War, knowing where to invest has never been trickier.

And yet, despite the UK stock market recently hitting a new all-time high, Mark and his team think many shares still trade at a substantial discount, offering savvy investors plenty of potential opportunities to strike.

That’s why now could be an ideal time to secure this valuable investment research.

Mark’s ‘Foolish’ analysts have scoured the markets low and high.

This special report reveals 5 of his favourite long-term ‘Buys’.

Please, don’t make any big decisions before seeing them.

Claim your free copy now

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.

Jack Tang has no position in any 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

Could the S&P 500 be heading for an almighty crash?

Christopher Ruane shares his take on why he thinks the S&P 500 could be heading for a big fall at…

Read more »

Middle-aged white man pulling an aggrieved face while looking at a screen
Investing Articles

Down 64%, this FTSE 250 stock offers a 13% dividend yield for investors

This struggling investment banker has suffered significant losses in the past five years, but it has the second-highest yield on…

Read more »

Investing Articles

1 stock market ETF I’ve been buying during the sell-off

The stock market's been all over the place in April, creating a fertile breeding ground for long-term buying opportunities.

Read more »

Investing Articles

As the Sainsbury share price bucks the price-war trend on FY results, I examine the dividend prospects

The J Sainsbury share price has been regaining ground, despite growing fears of intense competition in the supermarket sector.

Read more »

The words "what's your plan for retirement" written on chalkboard on pavement somewhere in London
Investing Articles

Should I invest in a Stocks and Shares ISA or a SIPP to retire early?

Early retirement is the ultimate goal for many investors, but choosing between a Stocks and Shares ISA and a pension…

Read more »

Investing Articles

Is now a great time to consider buying Greggs shares?

Greggs shares have been hammered in 2025. But have they now fallen too far? Paul Summers takes another look at…

Read more »

Investing Articles

Is it still a great time to buy cheap shares as stock market crash fears recede?

Fear of a stock market crash can trigger panic selling... but that surely can't be the best thing to do…

Read more »

Hand of person putting wood cube block with word VALUE on wooden table
Investing Articles

The Vodafone share price is 24% undervalued, according to analysts

Our writer’s been looking at the latest targets for the Vodafone share price. Although there’s a wide variation, the average…

Read more »