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At first glance, there’s a lot to like about Rio Tinto (LSE: RIO). City predictions of a 30% earnings improvement in 2019 leave the mining giant trading on a rock-bottom forward P/E ratio of 8.1 times. At current prices, it sports a corresponding dividend yield of 8.7% too.

But scratch a little deeper and suddenly the iron ore producer’s investment appeal falls apart, at least for this Fool. Bafflingly, prices of the steelmaking ingredient have improved in recent sessions following a spate of worrying economic releases from China (like factory activity slumping to 17-year lows and manufacturing PMI contracting for four months on the spin).

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Iron ore values have firmed up on hopes that the People’s Bank of China will be launching fresh stimulus to rejuvenate the flagging economy. Bit of a big call, in my book, as we enter a period of slower global economic growth and the US-Sino trade dispute threatens to drag on and on.

Prices in freefall

The possibility of crashing iron ore demand is only one part of the problem for Rio Tinto and its peers, however. Following a difficult start to the year, plagued by adverse weather and various supply disruptions, aggregated exports of the material roared back in quarter two and rose 11% from the prior three months to 331m tonnes (according to UBS).

This reflects, in part, the massive investment the world’s largest producers have used to develop their operations in recent years, a drive which threatens to keep the market swamped with abundant supply for years to come.

Broader price action is trending to the downside in reflection of these supply and demand concerns. Iron ore values have tumbled from five-year highs of $120 per tonne three months ago to around $90 today. And many forecasters expect values to keep rattling lower for the foreseeable future, something that obviously bodes ill for Rio Tinto which sources around 70% of total earnings from the steelmaking resource.

Now City analysts expect the FTSE 100 firm to reverse from that predicted profits rise in 2019 and record an 11% bottom-line fall next year. And it’d take a braver man than me to rule out more hefty falls further out.

A better dividend buy

For this reason I’d happily look past Rio Tinto and buy shares in Legal & General Group (LSE: LGEN) instead. In my opinion it’s a much better income stock even if its forward yield sits at a lower 7.2%.

Firstly, this figure still smashes up the corresponding average of 4.5% for the broader Footsie. And secondly, it’s in much better shape to keep growing earnings and thus payouts beyond 2019 (City analysts agree and so Legal & General’s yield for 2020 sits at an even better 7.7%).

I’ve long had a soft spot for the financial services giant, and financials released last month, showing operating profit soaring 11% in the first half of 2019, reinforced my positive opinion. Global annuity sales continue to boom and it can still expect bulk annuity volumes in its core UK market to keep growing for some years yet.

One final thing. At current prices, Legal & General deals on a forward P/E multiple of 7.6 times. I reckon it’s a steal right now.

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Royston Wild has no position in any of the shares 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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