Dividends At Rio Tinto plc Are Climbing

opencast.miningIf you’d bought Rio Tinto (LSE: RIO) (NYSE: RIO.US) shares five years ago, you’d have seen growth pretty much bang in line with the FTSE 100 of approximately 40%, to today’s 3,267p.

But you’d have had a scarier ride — the price peaked at over 4,600p in 2011 and has since fallen some way back. A large part of that will be optimism following the start of the stock market recovery after the big crunch, but then followed by fears of a Chinese slowdown and a subsequent fall in metals and minerals prices.

The cash

But that does neglect dividends. Here’s what Rio Tinto has been paying out in recent years, together with a couple of forecasts:

(to Dec)
Dividend Yield Cover Rise
2010 108c 1.5% 6.60x +140%
2011 145c 2.8% 5.58x +34%
2012 167c 2.9% 3.00x +15%
2013 192c 3.4% 2.88x +15%
210c 3.9% 2.50x +9.4%
227c 4.3% 2.46x +8.1%

* forecast

Too gloomy

Now, I’ve always thought the Chinese slowdown thing was overdone, and the economy does seem to be growing pretty close to the government’s target of 7.5% per year.

And I do think it’s short-sighted to evaluate a miner like Rio Tinto on short-term metrics like current commodities prices anyway — the long-term demand for Rio’s increasing production of iron ore, aluminium, copper, and coal is assured.

And with Rio shares on a forward P/E of 10.2 for this year, dropping to 9.6 for 2015, they look cheap to me.

Income from cyclicals?

But this is about dividends, and I while a cyclical stock like Rio Tinto is perhaps not so good for those seeking regular income today and who want consistency from year to year, I reckon it might actually be a better investment for a portfolio intended to provide income in 10 or 20 years time.

The average yield over the past few years have not differed too much from the FTSE 100, but the cyclical nature means that if you buy the shares when they’re in a down spell and the P/E is low, you stand a better chance of cornering higher effective yields in the future.

If you had bought Rio Tinto shares five years ago at around 2,400p, the 3.9% and 4.3% yields forecast for this year and next would effectively get you 5.3% and 5.7% based on the price you actually paid.

Retirement pot

And if you reinvest your dividend cash in shares, a bit of pound-cost averaging over the next couple of decades could result in a healthy income for your retirement.

Talking of retirement, if you're looking for more companies that can genuinely provide rising dividends to fund future years of comfort, you should have a read of "The Fool’s Five Shares To Retire On" report. They're all top FTSE companies, and between them they provide a nicely balanced selection.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.