Should I buy Rio Tinto shares for the monster dividend?

Rio Tinto is one of the highest-yielding shares in the FTSE 100. Edward Sheldon looks at whether he should buy the stock for that huge dividend.

| More on:

Rio Tinto (LSE: RIO) is a popular stock among income investors, and it’s easy to see why. Last year, the mining giant declared total dividends of $10.40 per share. At the current share price and GBP/USD exchange rate, that equates to a trailing dividend yield of about 15%.

I like receiving dividends as much as everyone. Especially in this environment, where share prices are choppy. Should I buy Rio for its monster dividend then? Let’s take a look.

Inflation Is Coming

Inflation is out of control, and people are running scared. But right now there’s one thing we believe Investors should avoid doing at all costs… and that’s doing nothing. That’s why we’ve put together a special report that uncovers 3 of our top UK and US share ideas to try and best hedge against inflation… and better still, we’re giving it away completely FREE today!

Click here to claim your copy now!

Rio Tinto’s massive dividend yield

In the near term, Rio is expected to keep paying out big dividends. At present, City analysts expect the group to pay out $8.83 per share for 2022 (this is only an estimate so it may not be accurate). That translates to a yield of around 12.9% at today’s share price.

That’s certainly an attractive yield. Right now, I’m only getting 1.5% from my bank. The yield from Rio is nearly nine times higher. So what’s the catch?

There are no ‘free lunches’ in investing

Well, one is that Rio, as a mining company, is highly ‘cyclical’. In other words, it tends to go through boom and bust cycles on a regular basis.

And the busts can be pretty brutal for shareholders. If we go back to the Global Financial Crisis of 2008/2009, for example, Rio’s share price fell from above 5,200p to near 800p as demand for commodities dried up. It took more than a decade to get back above the 5,200p level. Meanwhile, Rio reduced its dividend from 111.22 cents in 2008 to 45 cents in 2009.

So this is the kind of risk I’d be taking on if I was to buy Rio shares today. I might get a big dividend payout in the near term, but I could also face share price volatility and a lower payout in the medium to long term.

This is certainly something to consider given that growth in China (a major buyer of iron ore and copper) is slowing and there’s talk of a recession in the US. It’s worth noting that copper prices recently fell to their lowest in seven months amid concerns that a slowing global economy would require less commodities.

Dividend uncertainty

Another issue to consider here is that Rio has little control over its revenues and profits (which have a major impact on dividends) because commodity prices are set by market forces.

Unlike consumer goods giant Unilever, which can set its own prices and raise them when it needs to (like now), Rio has no control over its prices as they’re set by supply and demand.

This adds some uncertainty to the outlook. While the company is paying out big dividends now, there is no guarantee it will continue to do so.

Rio Tinto shares : my move now

In light of these issues, I’m not tempted to buy Rio for my portfolio right now. While the yield is certainly attractive, I prefer certainty and consistent growth over big payouts when investing for dividends.

Inflation Is Coming: 3 Shares To Try And Hedge Against Rising Prices

Make no mistake… inflation is coming.

Some people are running scared, but there’s one thing we believe we should avoid doing at all costs when inflation hits… and that’s doing nothing.

Money that just sits in the bank can often lose value each and every year. But to savvy savers and investors, where to consider putting their money is the million-dollar question.

That’s why we’ve put together a brand-new special report that uncovers 3 of our top UK and US share ideas to try and best hedge against inflation…

…because no matter what the economy is doing, a savvy investor will want their money working for them, inflation or not!

Best of all, we’re giving this report away completely FREE today!

Simply click here, enter your email address, and we’ll send it to you right away.

Edward Sheldon has positions in Unilever. The Motley Fool UK has recommended Unilever. 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.

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 considered, so you should consider taking independent financial advice.

More on Investing Articles

Smiling senior white man talking through telephone while using laptop at desk.
Investing Articles

£10,000 invested in BT shares 10 years ago is now worth this much

It's painful to remember that BT shares reached over £10 at the peak of the dot com bubble in 1999.…

Read more »

Close-up Of A Piggybank With Eyeglasses And Calculator On Desk
Investing Articles

Is now the time to buy bank shares?

Our writer considers whether bank shares could be a bargain buy for his portfolio right now -- or a potential…

Read more »

Happy young female stock-picker in a cafe
Investing Articles

After steep falls, are Royal Mail shares a steal?

Royal Mail shares have more than halved since peaking a year ago. After months of steep falls, this popular stock…

Read more »

Young Woman Drives Car With Dog in Back Seat
Investing Articles

Dirt-cheap, 1 of my best stocks to buy also pays an above-average dividend!

This Fool has decided to buy the shares on his best stocks to buy now list with the shares looking…

Read more »

Light bulb with growing tree.
Investing Articles

The AFC share price just tanked! Is now the time to buy?

The AFC share price fell nearly 10% on Wednesday after the H1 revenue announcement. So, should I add this stock…

Read more »

A pastel colored growing graph with rising rocket.
Investing Articles

These shares have been growing dividends for decades. I’d buy!

Our writer considers the merits for his portfolio of buying two shares with a track record of growing dividends.

Read more »

Close-up of British bank notes
Investing Articles

Is the M&G dividend yield heading to 10%?

As the M&G dividend yield heads towards double digits, out writer explains why he is considering buying more of the…

Read more »

man in shirt using computer and smiling while working in the office
Investing Articles

3 top dividend shares to buy now

With weakness in the markets, I reckon it's a good time to search for top dividend shares to buy now.

Read more »