Why Rio Tinto plc (LON:RIO) Is A Dividend Rockstar

Rio Tinto plc (LON:RIO) has pleased shareholders over the past 10 years, by paying out dividends. The company is currently worth UK£66.31b, and now yields roughly 7.0%. Does Rio Tinto tick all the boxes of a great dividend stock? Below, I’ll take you through my analysis.

Check out our latest analysis for Rio Tinto

5 questions to ask before buying a dividend stock

When researching a dividend stock, I always follow the following screening criteria:

• Is their annual yield among the top 25% 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?

• Can it afford to pay the current rate of dividends from its earnings?

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

LSE:RIO Historical Dividend Yield October 2nd 18

How well does Rio Tinto fit our criteria?

The current trailing twelve-month payout ratio for the stock is 54.9%, which means that the dividend is covered by earnings. Going forward, analysts expect RIO’s payout to remain around the same level at 59.8% of its earnings, which leads to a dividend yield of 5.5%. Moreover, EPS is forecasted to fall to $4.86 in the upcoming year.

When considering the sustainability of dividends, it is also worth checking the cash flow of a company. Companies with strong cash flow can sustain a higher payout ratio, while companies with weaker cash flow generally cannot.

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.

Relative to peers, Rio Tinto has a yield of 7.0%, which is high for Metals and Mining stocks.

Next Steps:

Keeping in mind the dividend characteristics above, Rio Tinto is definitely worth considering for investors looking to build a dedicated income portfolio. Given that this is purely a dividend analysis, I recommend taking sufficient time to understand its core business and determine whether the company and its investment properties suit your overall goals. There are three important factors you should further examine:

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.