Should You Buy Rio Tinto Limited (ASX:RIO) For Its Dividend?
Want to participate in a short research study? Help shape the future of investing tools and receive a $20 prize!
Dividends can be underrated but they form a large part of investment returns, playing an important role in compounding returns in the long run. Historically, Rio Tinto Limited (ASX:RIO) has been paying a dividend to shareholders. Today it yields 4.1%. Let’s dig deeper into whether Rio Tinto should have a place in your portfolio.
See our latest analysis for Rio Tinto
5 checks you should do on a dividend stock
When assessing a stock as a potential addition to my dividend Portfolio, I look at these five areas:
Is its annual yield among the top 25% of dividend-paying companies?
Has its dividend been stable over the past (i.e. no missed payments or significant payout cuts)?
Has it increased its dividend per share amount over the past?
Is is able to pay the current rate of dividends from its earnings?
Based on future earnings growth, will it be able to continue to payout dividend at the current rate?
How does Rio Tinto fare?
Rio Tinto has a trailing twelve-month payout ratio of 55%, meaning the dividend is sufficiently covered by earnings. In the near future, analysts are predicting a payout ratio of 58% which, assuming the share price stays the same, leads to a dividend yield of around 4.7%. Furthermore, EPS is forecasted to fall to $5.43 in the upcoming year.
If you want to dive deeper into the sustainability of a certain payout ratio, you may wish to consider the cash flow of the business. A business with strong cash flow can sustain a higher divided payout ratio than a company with weak cash flow.
If there’s one type of stock you want to be reliable, it’s dividend stocks and their stable income-generating ability. Whilst its per-share payments have increased during the past 10 years, there has been some hiccups. Investors have seen reductions in the dividend per share in the past, although, it has picked up again.
In terms of its peers, Rio Tinto has a yield of 4.1%, which is high for Metals and Mining stocks but still below the market’s top dividend payers.
Next Steps:
With this in mind, I definitely rank Rio Tinto as a strong dividend stock, and makes it worth further research for anyone who likes steady income generation from their portfolio. Given that this is purely a dividend analysis, I urge potential investors to try and get a good understanding of the underlying business and its fundamentals before deciding on an investment. There are three fundamental factors you should further research:
Future Outlook: What are well-informed industry analysts predicting for RIO’s future growth? Take a look at our free research report of analyst consensus for RIO’s outlook.
Valuation: What is RIO worth today? Even if the stock is a cash cow, it’s not worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether RIO is currently mispriced by the market.
Other Dividend Rockstars: Are there better dividend payers with stronger fundamentals out there? Check out our free list of these great stocks here.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
