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This 7% dividend stock still looks a far safer bet than the FTSE 100

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A miner down a mine shaft
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With its 3.8% dividend yield, the FTSE 100 could be an excellent income investment for your portfolio. 

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Sudden setback

Vedanta (LSE: VED) might not be the first choice for income seekers, but the company’s 7% dividend yield is, in my opinion, too attractive to pass up. 

The India-focused miner has recently come under pressure following the police killing of 13 people who were protesting against a proposed expansion of a copper smelter in the south Indian town of Tuticorin, owned by Vedanta subsidiary Sterlite Copper. Protesters have been trying to stop the development, complaining that it would cause a dangerous increase in pollution from the plant, which is India’s largest smelter. The proposed expansion would have doubled annual capacity to 800,000 tonnes. 

Over the weekend it was announced that, following the use of lethal force by police against protesters, the government had moved to shut down the smelter for good. This will hit Vedanta’s bottom line, but it’s unlikely to be terminal. According to a press release published by the firm last week, despite the size of this smelter, it accounted for only 5.4% the group consolidated EBIDTA during the previous financial year. 

So, even though this is a set back for the group, it’s not the end of the world. What’s more, over the past 12 months, rising commodity prices have helped Vedanta roar back to profit, something City analysts had been expecting to continue into 2018. With this being the case, rising commodity prices should help the group offset some of the hit from the smelter closure. As my Foolish colleague Peter Stephens recently highlighted, Vedanta “offers a diverse business model which could provide it with a lower risk profile than many of its industry peers.

Unloved income 

Shares in Vedanta have lost nearly 17% over the past week due to its Tuticorin smelter problems. After this decline, the shares have fallen to a valuation of 6.6 times forward earnings and support a dividend yield of 6.9%. This valuation suggests to me that most of Vedanta’s problems are now reflected in the company’s stock price. 

Indeed, after the recent declines, its shares are the cheapest in the UK metals and mining sector, a valuation that doesn’t seem to take into account the firm’s projected growth over the next few years. City analysts have been expecting group net profit to more than double through 2020. And while the closure of the smelter now means it’s unlikely the group will meet this lofty growth target, I believe it’s still possible Vedanta will grow earnings at a double-digit annual rate over the next few years as other growth initiatives progress and the company profits from higher commodity prices. 

And even if the group’s growth stalls, the stock’s dividend looks secure. Last year, the distribution was covered 1.3 times by earnings per share and analysts had been expecting the cover to hit 2.1 times this year.

All in all, Vedanta looks to me to be a much better income buy than the FTSE 100, despite its recent troubles, which are not expected to be terminal. 

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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