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Is The Potential Reward Worth The Risk At High Yielders Rio Tinto plc, Glencore PLC And Royal Dutch Shell Plc?

The energy and natural resources sectors have long been dependable picks for those seeking market-mashing dividend yields. Even as pressured earnings have prompted dividend growth to be halted, the world’s major drillers and diggers have continued to outperform their listed peers.

And for the likes of Rio Tinto (LSE: RIO), Glencore (LSE: GLEN) and Royal Dutch Shell (LSE: RDSB), this theme is yet to let up. Thanks to massive fears over commodity markets, shares across the resources segments have shuttled lower — Rio Tinto has seen its share price slump 30% during the past 12 months alone, while Glencore and Shell have conceded 66% and 36% respectively.

As a consequence these companies carry yields that many will consider too good to pass up — Glencore leads the pack with a monster readout of 7.9% for 2015, oil giant Shell boasts a yield of 7.1%, while Rio Tinto boasts a not-too-shabby 6.1%.

Dividend cover on the light side

Still, I believe investors should resist the pull of these eye-popping yields as broker projections are likely to disappoint. Not surprisingly all three operators are expected to punch heavy, double-digit earnings drops in the current period, leaving predicted payouts woefully exposed.

Over at Rio Tinto, an estimated dividend of 222 US cents per share represents an upgrade from last 2014’s 215-cent reward, creating meagre dividend coverage of just 1.1 times — any reading below 2 times is usually considered risky territory, and for those operating in the commodities categories this point is particularly pertinent as material prices keep on sliding.

Glencore is anticipated to keep the payment locked at 18 cents per share in 2015, although this still exceeds predicted earnings of 15.4 cents! And even though Shell is expected to cut 2014’s dividend of 188 cents per share to 185 cents this year, coverage also registers at a nail-biting 1.1 times.

Cash scramble underlines capital pains

I do not believe such numbers have any grounding in reality, particularly as the firms desperately scramble to shore up the balance sheet. In August Glencore announced it was cutting capital expenditure in both 2015 and 2016, to $6bn and $5bn respectively, while it is also slashing jobs and hiving off non-core assets to improve its capital strength.

This mirrors similar steps across the industry — Shell took the hatchet to an additional 6,500 posts at the end of July, while it also announced the $1.4bn sale of a 33% stake in its Showa Japanese business. It also cut planned capex for the second time this year, to $30bn from $35bn in 2014, an action matched by Rio Tinto shortly afterwards — cuts to $5bn for 2015 and $6bn next year are currently planned.

But the threat of further commodity price falls means that these operators are likely to need to introduce even more measures to save cash, a worrying scenario for income hunters — both copper and oil sunk to fresh multi-year lows last week at $4,980 per tonne and $42.50 per barrel correspondingly.

And Shell of course still had to finance the £47bn acquisition of rival BG Group — the company already sports a colossal $52.9bn debt pile, while the situation is hardly great at Glencore or Rio Tinto either. Glencore’s net debt stood at $29.6bn as of June, while its mining peer saw net debt rise to $13.7bn at the mid-point of 2015. Given these factors, I believe only the foolhardy would expect the companies I have mentioned to meet the City’s bloated dividend targets.

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Royston Wild 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.