Are Rio Tinto Limited shares ridiculously cheap?

Credit: iStock

Shares of Rio Tinto Limited (ASX: RIO), the world’s second-largest iron ore miner, leaped 4% higher on Monday.

Then, overnight in London, as fears of Britain exiting the Eurozone again received attention from investors, Rio Tinto’s FTSE-listed shares jumped 6.5%.

Source: Google Finance

Source: Google Finance

No doubt many investors will be left wondering if it’s time to buy into one of Australia’s mining success stories.

Are Rio Tinto shares ridiculously cheap?

At $45 a share, Rio Tinto shares appear to be trading on a decent valuation, given its price-earnings ratio of 14x, with a dividend yield of 3.2% to boot.

Not so fast.

Despite its cheap appearance on first glance, Rio Tinto is forecast to cut its dividend heavily over coming years as it grapples with the fallout in mining and the associated slump in profits. Next year, in fact, the miner is forecast to pay just $1.49 in dividends, according to current consensus estimates. This year, it paid $2.91.

Foolish takeaway

Rio Tinto’s short-term price movements appear to be a result of Britain’s possible exit from the Eurozone, and the all too commonplace kneejerk reaction by share market investors to flee to commodity stocks in times of economic or political uncertainty.

Together with rival BHP Billiton Limited (ASX: BHP), Foolish investors would be wise to look past the recent price movements and go in search of high-yielding dividend shares to buy today.

Personally, I'm also looking for other - faster growing - dividend shares to add to my portfolio, like the one The Motley Fool's expert analysts hand-picked as their best dividend share idea for 2016.

Indeed, our resident dividend experts named their Top Dividend Share for 2016. Not only are the shares dirt cheap, the company is growing and trading on a 5.6% fully franked dividend yield. Simply click here to gain access to this comprehensive FREE investment report, including the name of this fast growing ASX dividend share. No credit card required!

Motley Fool Contributor Owen Raszkiewicz does not have a financial interest in any company mentioned in this article. Owen welcomes -- and encourages -- your feedback on Google+, LinkedIn or you can follow him on Twitter @ASXinvest.

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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