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How Rio Tinto plc Can Pay Off Your Mortgage

Rio TintoThe last few years have proven to be rather challenging for Rio Tinto (LSE: RIO) (NYSE: RIO.US). That’s because demand for metals has fallen as the sustainability of the emerging market growth story has been called into question. Indeed, shares in Rio Tinto have fallen by 20% over the last three years, while the FTSE 100 (FTSEINDICES: ^FTSE) is up 17% over the same time period.

However, the long-term future of Rio Tinto looks strong and it could prove to be a winning investment that could help pay off your mortgage. Here’s why.

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A Return To Growth

Although earnings for the current year are expected to fall by around 8%, Rio Tinto is forecast to bounce back next year when the bottom line is set to rise by 9%. This may not appear to be all that appealing, but the key takeaway for investors is that demand for metals is starting to pick up.

Certainly, it remains some way off its pre-credit crunch peak, but recent macroeconomic data points to a pickup in China in particular, with its PMI (purchasing managers index) showing an expansion for the first time in six months, for instance. While the road ahead may be a bumpy one for emerging markets, a continued improvement in their outlook could benefit Rio Tinto hugely and enable the company to post stronger profitability going forward.

A Low Valuation

As well as a potential pick-up in demand aiding its bottom line, Rio Tinto could prove to be a great investment as a result of its current valuation. Indeed, it is extremely low, with shares in the company trading on a price to earnings (P/E) ratio of just 11.5. This is significantly lower than the FTSE 100 P/E of 13.8 and highlights the attractive value that is currently on offer at Rio Tinto.

A Potential Income Play

Although mining companies are not historically known for their strong yields, Rio Tinto currently yields a rather impressive 3.6%. That’s slightly higher than the FTSE 100’s yield of 3.5%, but the key takeaway for investors is that Rio Tinto is forecast to grow dividends per share at a brisk pace, with them having a 7% rise pencilled in for next year. This, along with a relatively low dividend payout ratio of 41%, means that there is vast potential for dividend rises in future. Therefore, income levels for investors in Rio Tinto could become even more attractive than at present.

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Peter Stephens has no position in any shares mentioned. The Motley Fool has no position in any of the shares mentioned.

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