The Rio Tinto (LSE: RIO) dividend yield now stands at an eye-catching 7.41%. At such a high return, the tenth-highest on the FTSE 100, I think investors should look into this stock.
A £10,000 stake would return over £700 in dividends per year at this rate, and the firm offers regular special dividends and buybacks too. I’d say there’s brilliant value here.
This weighty dividend is no flash in the pan, either. Shareholders have enjoyed market-beating dividends for years, and forecasts look excellent for the next two years.
| Year | 2020 | 2021 | 2022 | 2023 | 2024 (forecast) |
| Return | 5.43% | 10.06% | 9.11% | 8.16% | 7.40% |
The miner has even made payments every single year going back to 1992, slowly increasing most of that time. A regular, increasing dividend is a great sign of a well-managed company that can generate big cash flows year after year.
19% off
The 5,187p share price seems like good value, on top of all this. It’s down 19% since February, tracking the slide of the FTSE 100, and does look something of a bargain. It trades at around nine times forward earnings, which I see as fairly priced for the sector.
A strong balance sheet caps off the good news. The firm isn’t bogged down by debt and has plenty of cash on hand to fund further growth opportunities as shown by recent investments in new mines in Mongolia and Argentina. Equally, the debt-to-equity ratio and interest coverage are both at very reasonable levels.
| Rio Tinto | |
| Total debt | $12.2bn |
| Total equity | $50.2bn |
| Debt-to-equity | 24.3% |
| Interest coverage | 18.9 |
Are there risks? Well, one is the fluctuating prices of metals and minerals. All miners have to deal with changing prices for the things they dig up, which is why mining is considered a cyclical industry.
Iron ore, which makes up 75% of Rio Tinto’s adjusted earnings, is trading high right now at $116 a ton. A drop here would reduce cash flows and potentially have some impact on future dividend payments.
£58 a share
Analysts do expect earnings to go down in the next few years, likely because iron ore won’t stay at its current high price. I’m not too concerned about a small decrease though. I don’t think analysts are either, with the 5,844p share price consensus some way higher than its current price.
Much of the demand for iron ore comes from the real estate industry in China. As the country opens up, it might be a useful tailwind for the miner as well.
In all, the FTSE 100 is a great place to find cheap shares and bountiful dividends at the moment, and I’d include Rio Tinto as one of the stocks that investors should consider. I own a position myself, and I may look at topping up here soon.
