Big mining company Rio Tinto (LSE: RIO) could be a good candidate for a second income derived from dividends.
There’s no doubt that the yield is big. With share price near 5,157p, it’s forecast to be just over 6.6% for 2024.
Is a big yield enough?
But that’s not the primary consideration when investing in a resources company like this.
This is a cyclical beast. And that’s the first lens to use when looking at the business.
There’s no escaping the fact that a lot of the financial outcomes of the enterprise are beyond the control of the directors. Rio Tinto is hostage to the selling prices of the commodities it produces. And those figures move up and down according to supply, demand and other factors.
If prices are low, so will Rio’s profits likely be down. And if prices are high, profits may boom for the company.
Rio is known as a diversified operation dealing in several commodities. But it has an outsized position in iron ore. So, the firm’s performance with that resource tends to dominate the company’s financial outcomes.
The big question for me is, where is the price of iron ore going over the next few years? And the somewhat weaker and smaller answer is, I have no idea!
But I do have a view that commodities in general will remain in demand and the world economy will muddle through, as it always has done.
But even with that belief under my belt, I still know it’s possible for Rio Tinto’s earnings to move up and down over the coming years. And that means the shareholder dividend could also be volatile.
Positive news and a red flag
The recent record of dividend payments is something of a red flag. After rising each year from 2017 to 2021, the shareholder payment declined by 37% in 2022. And City analysts predict further falls in 2023 and in 2024.
But the fact that Rio Tinto’s business is cyclical means it responds to general macroeconomic conditions. So, if geopolitical tensions and economic conditions improve in the coming years, there’s a good chance earnings and dividends may rise again.
And the share price could join in the party and return to earlier highs.
A positive piece of news came from the company on 17 October 2023 with the third-quarter production results release.
Chief executive Jakob Stausholm said the company signed agreements in the period aimed at increasing operations in aluminium and copper. And I reckon expanding the diversity turnover across resources may help to make trading outcomes less volatile in the future.
However, from a dividend-investing point of view, Rio Tinto does not tick enough boxes for me. I want my second income providers to have a multi-year record of modestly rising earnings, revenue, cash flow and dividends. And Rio Tinto fails that basic test.
But the stock could do well for investors who want to try to time the cycle. And general price inflation may help a positive investment outcome by keeping upwards pressure on commodity prices.
