The Rio Tinto (LSE:RIO) share price has marched northwards in recent sessions. Yet a 7% decline since the start of 2023 means the miner still offers sky-high dividend yields today.
For this year the mining giant offers a gigantic 6% dividend yield. This is far above the 3.7% forward average for FTSE 100 index shares.
City analysts expect the annual payout to drop in 2024. However, the yield still sits at a market-beating 5.7%.
I already own Rio Tinto shares in my portfolio. Should I buy more right now to boost my passive income?
Solid dividend forecasts
Profits at mining companies like this are highly cyclical. When the global economy cools, demand for commodities always follows suit. As a consequence dividends can also drop sharply.
This has certainly proved the case at Rio Tinto. Last year it slashed the total dividend to 492 US cents per share from 793 cents in 2022. Earnings and cash flows cooled considerably as raw material shipments to China dipped and high costs weighed.
City analysts are expecting the company’s profits to keep falling over the short term too. This also results in lower predicted dividends of 411 cents and 396 cents in 2023 and 2024 respectively. Such figures are in line with Rio Tinto’s policy of paying 60% of yearly earnings out in dividends.
But on the plus side, those projected rewards still offer those above-average yields. And I believe the miner is in good shape to pay dividends close to what the City is expecting, if not bang on what analysts are predicting.
Dividend cover isn’t the best. Projected payouts are covered 1.7 times by anticipated earnings over each of the next two years. This is below the widely-accepted security benchmark of two times and above.
Having said that, the firm has a strong balance sheet it can call upon to help it pay those large dividends. It swung to having net debt of $4.2bn at the end of 2022 from net cash of $1.6bn a year earlier. But the company’s net-debt-to-EBITDA ratio still stood at a meagre 0.1.
Why I’d buy Rio Tinto shares
So today I’m considering adding more Rio Tinto shares to my portfolio. Right now it offers excellent all-round value for money. On top of that 6% forward dividend yield the business trades on a forward price-to-earnings (P/E) ratio of 10 times.
I expect earnings and dividends at Rio to soar over the long term. Phenomena like the growing green economy and rapid urbanisation in emerging regions are set to drive commodities demand through the roof. Yet supply growth in markets like iron ore and copper is tipped to remain weak, meaning raw materials look on course to surge.
I also like Rio Tinto because of its considerable financial resources that it can use to grow. This month, for example, it invested $700m in a joint venture to manufacture and market recycled aluminium products with Giampaolo Group in North America.
All things considered, I think Rio Tinto is a brilliant value stock to buy right now.
