Rio Tinto (LSE: RIO) is a popular stock among income investors, and it’s easy to see why. Last year, the mining giant declared total dividends of $10.40 per share. At the current share price and GBP/USD exchange rate, that equates to a trailing dividend yield of about 15%.
I like receiving dividends as much as everyone. Especially in this environment, where share prices are choppy. Should I buy Rio for its monster dividend then? Let’s take a look.
Rio Tinto’s massive dividend yield
In the near term, Rio is expected to keep paying out big dividends. At present, City analysts expect the group to pay out $8.83 per share for 2022 (this is only an estimate so it may not be accurate). That translates to a yield of around 12.9% at today’s share price.
That’s certainly an attractive yield. Right now, I’m only getting 1.5% from my bank. The yield from Rio is nearly nine times higher. So what’s the catch?
There are no ‘free lunches’ in investing
Well, one is that Rio, as a mining company, is highly ‘cyclical’. In other words, it tends to go through boom and bust cycles on a regular basis.
And the busts can be pretty brutal for shareholders. If we go back to the Global Financial Crisis of 2008/2009, for example, Rio’s share price fell from above 5,200p to near 800p as demand for commodities dried up. It took more than a decade to get back above the 5,200p level. Meanwhile, Rio reduced its dividend from 111.22 cents in 2008 to 45 cents in 2009.
So this is the kind of risk I’d be taking on if I was to buy Rio shares today. I might get a big dividend payout in the near term, but I could also face share price volatility and a lower payout in the medium to long term.
This is certainly something to consider given that growth in China (a major buyer of iron ore and copper) is slowing and there’s talk of a recession in the US. It’s worth noting that copper prices recently fell to their lowest in seven months amid concerns that a slowing global economy would require less commodities.
Dividend uncertainty
Another issue to consider here is that Rio has little control over its revenues and profits (which have a major impact on dividends) because commodity prices are set by market forces.
Unlike consumer goods giant Unilever, which can set its own prices and raise them when it needs to (like now), Rio has no control over its prices as they’re set by supply and demand.
This adds some uncertainty to the outlook. While the company is paying out big dividends now, there is no guarantee it will continue to do so.
Rio Tinto shares : my move now
In light of these issues, I’m not tempted to buy Rio for my portfolio right now. While the yield is certainly attractive, I prefer certainty and consistent growth over big payouts when investing for dividends.