Should You Buy Rio Tinto Limited (ASX:RIO) For Its Dividend?

A sizeable part of portfolio returns can be produced by dividend stocks due to their contribution to compounding returns in the long run. Historically, Rio Tinto Limited (ASX:RIO) has paid a dividend to shareholders. It currently yields 5.5%. 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

Whenever I am looking at a potential dividend stock investment, I always check these five metrics:

• Does it pay an annual yield higher than 75% of dividend payers?

• Does it consistently pay out dividends without missing a payment of significantly cutting payout?

• Has dividend per share risen in the past couple of years?

• Does earnings amply cover its dividend payments?

• Will it have the ability to keep paying its dividends going forward?

ASX:RIO Historical Dividend Yield August 30th 18

Does Rio Tinto pass our checks?

Rio Tinto has a trailing twelve-month payout ratio of 54.9%, meaning the dividend is sufficiently covered by earnings. Going forward, analysts expect RIO’s payout to increase to 63.0% of its earnings, which leads to a dividend yield of around 5.5%. However, EPS is forecasted to fall to $5.02 in the upcoming year. Therefore, although payout is expected to increase, the fall in earnings may not equate to higher dividend income.

Reliablity is an important factor for dividend stocks, particularly for income investors who want a strong track record of payment and a positive outlook for future payout. Although RIO’s per share payments have increased in the past 10 years, it has not been a completely smooth ride. Investors have seen reductions in the dividend per share in the past, although, it has picked up again.

Relative to peers, Rio Tinto generates a yield of 5.5%, which is high for Metals and Mining stocks but still below the market’s top dividend payers.

Next Steps:

With these dividend metrics in mind, I definitely rank Rio Tinto as a strong income stock, and is worth further research for anyone who considers dividends an important part of their portfolio strategy. 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. Below, I’ve compiled three essential factors you should further research:

1. 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.

2. 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.

3. Other Dividend Rockstars: Are there better dividend payers with stronger fundamentals out there? Check out our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.