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Need more investment income? I’d buy this FTSE 100 giant paying 7.7% a year!

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As the Covid-19 pandemic worsened two months ago, share prices started slumping. Worse still, many companies halted cash dividends. Even FTSE 100 members stopped funnelling cash to investors, including household names such as Royal Dutch Shell and HSBC.

This is not the death of FTSE 100 dividends

Of course, share returns are made up of capital growth plus dividends. The good news is that, since hitting its 2020 low on 23 March, the FTSE 100 has bounced back strongly. It has leapt almost a fifth (20%) from below 5,000 to almost 6,000 today.

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However, I firmly believe that focusing on dividends now could yield bumper future returns. For me, strong companies that continue to pump out dividends in these troubled times stand out from the rest of the herd.

Of course, when a company cancels, cuts or defers dividends, it doesn’t harm the underlying business. Indeed, by keeping this cash and preserving capital, many firms will be better positioned in a post-Covid world. Personally, I’d much skip a few dividends than lose my capital in a busted business.

Big dividends from a ‘boring’ company

While investors sit tight and wait for share prices to recover, many need to generate more income from their distressed portfolios and spare cash. As a margin of safety, I’ve been focusing my attention on FTSE 100 dividend giants, such as Vodafone.

Seeking out a combination of sheer size and high, solid and consistent dividends, I came upon Rio Tinto (LSE: RIO). This is very much a ‘boring’ company: it’s the world’s third-largest mining companies, boring big holes into the earth to extract metals and minerals.

Rio Tinto (‘red river’ in Spanish) was founded in Britain in 1873, but today has dual listings in the UK and Australia. Many of its mines, smelters and refineries are situated in Australasia, Canada and developing countries. It digs up and sells iron ore, aluminium, copper, diamonds, titanium, gold, and borates for crops.

To give you an idea of its global size and scale, Rio employs 46,000 workers across 60 operations and projects in 36 countries. It has 2,000 customers and 37,000 suppliers worldwide.

As for its financials, Rio’s current share price of 4,268p values it at £70 billion, propelling it to #5 in the FTSE 100 heights. In the latest financial year, earnings per share of 399p puts Rio on a modest price-to-earnings ratio of 10.7 and a tasty earnings yield of 9.3%.

Rio’s main attraction for me is definitely its dividend. The latest full-year payout of 350.6p (including special dividend) equates to a fat dividend yield of 8.2%. Brokers expect this payout to be trimmed in 2020, lowering the yield to around 7.7%. It’s worth noting that earnings cover the dividend only by a modest margin. But that’s because Rio is a veritable cash machine, distributing almost all of its earnings to shareholders as cash dividends.

In summary, for income-seeking investors, Rio Tinto offers an attractively high yield, while its shares have held up well, falling by a mere 7% over the past 12 months. Not bad for a ‘boring’ company!

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Cliffdarcy has no position in any of the shares mentioned. The Motley Fool UK has recommended HSBC Holdings. 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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