Each week, we update the Data section of our website. Aside from the popular short interest section, another area of interest is the Top UK dividend yields. This shows where income investors can find good value right now. At the moment, one of the top stocks that catches our eye is Rio Tinto (LSE:RIO). It currently has a dividend yield of 10.9%. Here’s what you need to know.
Short term commodity prices hurting
Rio Tinto is one of the largest metal and mining companies in the world. It is dual-listed in Australia and the UK. For the UK share, the share price is down around 5% over the past year. In the shorter term, it’s seen a drop of 16% in the past three months.
The main driver behind the move lower recently has been falling iron ore prices. It’s a core component of business for Rio Tinto. It’s dropped from $220/T back in July to $90/T at the moment. Naturally, this hits the profit margin of Rio Tinto as the end product that it tries to sell is worth considerably less than it was back in the summer.
From a fundamental view, iron ore isn’t the only commodity that has lost shine in recent months. The concern here is that China are the largest consumer or iron ore and several other commodities. For example, iron ore is a component of steel production. If the China growth story slows down, then demand for these raw materials should also decrease.
This is certainly a real risk, but most of the move lower we feel has been driven by negative speculation.
Reasons to be positive
In terms of reasons to be positive, we think there are plenty that can outweigh the above risk. Half-year results were positive, with revenues up 71% year-on-year. Profit after tax rose 271% to $12.3bn. This allowed the company to pay out a generous dividend to investors, equating to around 75% of the underlying profits.
The fact that Rio Tinto has this push towards paying out profits as dividends is one reason why the yield is so high. Yet it could also see cash flowing back to shareholders as it continues to slim down with cost cutting. If this continues then some of the free cash flow will likely head towards reducing net debt, but we still feel dividends is a key way that the business will use to keep shareholders happy.
Also, we think the risk of commodity prices is somewhat offset by the size of the dividend yield. At 10.9%, it’s very high. When I consider yields available on cash ISA’s, corporate bonds or even buy-to-let properties, I still come back to the 10.9%. In terms of ease and size of investment, buying a stock with this yield is attractive.
Overall, we think that the slump in the share price (helping to push up the dividend yield) and the generous dividend per share makes Rio Tinto a good buy for income investors.