There are three FTSE 100 stocks that offer double-digit dividend yields at present. These are the industrial metal miners Evraz, BHP, and Rio Tinto. It is no coincidence, of course, that all three are miners. Commodity stocks have enjoyed an unexpected boom in the past year, as Chinese government stimulus encouraged metal demand despite a raging pandemic.
Cooling-off in commodity boom
However, exactly because of the nature of this commodity boom, I find myself asking if these eye-watering dividend yields are sustainable. I mean, the stimulus is now being rolled back. This is partly to cool off the high commodity price inflation that could wreak havoc over time if not brought under control now. Lower demand for commodities means they will realise lower prices and that is likely to hurt miners’ bottom lines.
Both Evraz and Rio Tinto are expected to give dividend yields of 18% to investors this year. It is great for now, of course, but going by the correction expected in the near future I am unsure if this can continue. And I really want to assess this because I have bought both stocks. Figuring out the returns in the next couple of years is important for me, to know what to do next with these investments. Note that here I exclude BHP from the discussion because it is due to get de-listed from the London Stock Exchange shortly.
Individual issues holding these FTSE 100 stocks back
Besides the commodity price challenge, individual issues have emerged for the both of them as well that could hold back their progress in the foreseeable future. For instance, Rio Tinto has reported a drop in production in the third quarter of this year. As a result, it has also reduced its production guidance. Evraz has seen a spate of increased taxes in its home country, Russia, which is likely to impact its financials as well.
Why dividend yields can still stay high
These are disappointing signs for the two stocks. But there is another side to the story as well.
Reduced prospects could bring their share prices down, for sure. But since dividend yield is the dividend amount as a percentage of the current share price, their yields could still continue to look good. It all depends on how their dividends change relative to the share price. Even if we assume that dividends will fall, as long as the share price falls even more, the dividend yield may still remain elevated.
Also, the global economy is recovering. That means commodity demand could still stay strong even if China loses steam. And a correction in metal prices is not the same as a slump. It only means that they are declining from their recent scorching highs. So, I think there is still much to look forward to for the miners.
Moreover, both Evraz and Rio Tinto have offered good dividend yields in the past. For Evraz, the five-year average yield is also at 10%+ rates, while that for Rio Tinto is 6%+.
What I’d do
I am not too worried about these companies’ dividend yields. Even if their double-digit yields decline, I reckon they could still continue to pay me good dividends.
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Manika Premsingh owns shares of Evraz and Rio Tinto. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.