Should You Buy Rio Tinto For Its 17% Dividend Yield?

• Even if we ignore the special dividend, Rio Tinto still has a dividend yield of 13% from its ordinary dividend alone.
• Even over a period as long as a decade, Rio Tinto’s results have been driven by iron ore prices more than anything else.
• With Rio Tinto’s £51 share price sitting near the middle of my fair value (£35) and good value (£64) estimates, it should come as no surprise that its margin of safety is 47%.

Thanks to significantly higher prices for its core products of iron ore, aluminium, and copper, the company’s 2021 dividend comes to more than $10.

That’s almost twice the previous record dividend and it gives Rio Tinto (NYSE:RIO) a dividend yield of almost 17% at its current share price of $62.

In GBP that’s a dividend of almost £8.50 from shares costing £51 each, which is an eye-wateringly impressive yield.

Unfortunately, that huge dividend includes special dividends which are unlikely to be paid out on the same scale again. However, even if we ignore the special dividend, Rio Tinto still has a dividend yield of 13% from its ordinary dividend alone.

Of course, if you know anything about investing, you’ll know that buying a stock simply because it has a very high dividend yield is usually a very bad idea.

Very high yields are often followed by very large dividend cuts, so instead of focusing solely on dividend yields, it’s better to have a broader view of a company and its ability to pay dividends over the long term.

With that in mind, in the rest of this review, I’ll walk you through how I approach the task of estimating Rio Tinto’s future dividends, ending with an estimate of its fair value and how much I might invest in the company at its current price.

To set the stage, let’s begin with a little history.

Rio Tinto has been one of the world’s leading mining companies for 200 years

Rio Tinto gets its name from the Rio Tinto River in Spain. The name means red river and, because the river contains large quantities of dissolved iron, it is literally red. The river contains Iron because the surrounding area is rich in minerals and metals, including iron, copper, gold, and silver, and it has been mined for at least 5,000 years.

After a period of disuse, the Spanish government restarted the mines in 1724, but their operations were inefficient. In 1873, the mines were sold to a consortium of investors led by Deutsche Bank (DB), and the Rio Tinto Company was born.

After World War I, the company began to diversify away from Spain through a series of joint ventures and acquisitions, and eventually it sold most of its Spanish operations in 1954.

Over the decades, these deals took Rio Tinto’s operations into Africa, Canada, and other countries, most notably Australia. In 1962, Rio Tinto Company merged with Consolidated Zinc, a significant Australian mining business, and in 1995 they became a dual-listed company in the UK and Australia and that structure remain in place today.

Rio Tinto’s operations are now focused on mining iron ore, aluminium (bauxite), and copper, plus a range of other minerals and metals such as gold, silver, uranium, and lithium. Over the last decade, around 80% of the company’s earnings came from Iron ore, 10% came from aluminium, 5% from copper, and 5% from other minerals and metals.

Like most miners, Rio Tinto’s growth has been volatile

Understanding a company’s long-term growth track record is important because it can give us useful insights into its competitive strengths and potential for future growth.

Unfortunately, this becomes more difficult if the company’s performance has been volatile, and if you know anything about commodities, you’ll know their prices can be extremely volatile.