The annual dividend yield of metals and mining multinational Rio Tinto (LSE: RIO) is currently at a staggering 8.6%. That means a £10,000 investment would net £860 each year in payouts to shareholders alone.
With compound interest working its magic, that £10,000 would become £20,000 in less than nine years and £118,000 over 30 years. That’s assuming no cuts to the dividend or share price falls (neither of which are guaranteed).
Sounds like a good investment when put like that, but that doesn’t mean I’m going to jump in with both feet. First, I must answer a crucial question. What’s the dividend likely to be in years to come?
What’s the future dividend yield?
Here’s a table of the total yield for Rio Tinto stock since 2015. This is the percentage return to shareholders including dividend payouts and share buybacks.
| Year | Total yield |
| 2022 | 9.11% |
| 2021 | 10.06% |
| 2020 | 6.07% |
| 2019 | 10.85% |
| 2018 | 10.34% |
| 2017 | 4.93% |
| 2016 | 4.86% |
| 2015 | 9.36% |
I can see that the current 8.6% yield is no flash in the pan. In fact, in some years the company returned even more than that. However, there were years when the payout was much lower. Overall? I’m encouraged by the high consistent payouts.
Another useful metric is the percentage of earnings paid out in dividends. For the mining sector – which has high dividends – a percentage of less than 75% is good to show the company isn’t overextending itself by paying out too much of its earnings to shareholders.
In 2021, Rio Tinto returned $16.8bn in cash to shareholders out of total earnings of $21.2bn. That’s a percentage of 79%, which is on the high side.
In fact, the latest trading update said the company “expects total cash returns to shareholders over the longer term to be in a range of 40 to 60% of underlying earnings”. So there’s strong evidence that this dividend may come down significantly in the future, unfortunately.
I’m not buying stocks for quick wins, though. I want to make investments in quality companies over a long time horizon, and that means doing my homework on the company itself.
Earnings and revenue
A good starting point for analysing a company is its price-to-earnings ratio. We take the share price divided by the earnings per share and it tells us roughly how cheap or expensive a company is.
Rio Tinto has a P/E ratio of 6.9, which is quite cheap compared to the FTSE 100 average of around 14, and it’s not too far off the UK metals and mining industry average of 5.7. That’s a figure I’m happy with because it doesn’t indicate any major problems.
A company’s five-year growth rates can tell a story too. The following table shows that Rio Tinto has enjoyed revenue increases in each of the last five years – more good news.
| Revenue | % Change Year-on-Year | |
| 2021 | $63.5bn | +42.4% |
| 2020 | $44.6bn | +3.2% |
| 2019 | $43.2bn | +6.7% |
| 2018 | $40.5bn | +1.2% |
| 2017 | $40.0bn | +18.3% |
Is it a buy?
As far as income stocks go, Rio Tinto looks to me like a quality investment. The company’s financials show that an 8.6% yield might be a touch higher than I can expect in the future, but I’ll still be looking to open a position the next time I make changes to my portfolio.
