3 reasons the 6% Rio Tinto dividend yield looks safe to me

Rio Tinto could be a top option for income investors right now thanks to its big yield.

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Key points

  • Rio Tinto pays billions of dollars to its shareholders in dividends each year
  • I believe this will continue and support 6%+ dividend yields
  • This is thanks to favourable commodity prices and its production growth plans

One of the biggest dividend payers on the Australian share market is Rio Tinto Ltd (ASX: RIO).

Each year, the mining giant rewards its shareholders with billions of dollars of dividends. This more often than not means that Rio Tinto shares trade with a dividend yield well ahead of the market average.

The good news is that I believe this will be the case for at least the next couple of years. In fact, I suspect that anyone buying shares today will receive at least a 6% dividend yield in FY 2023 and FY 2024.

Here are three reasons why:

Favourable commodity prices

As a miner, the price of certain commodities will have the biggest impact on Rio Tinto's earnings, and none more so than the iron ore price. In FY 2022, US$18.6 billion of the company's US$27 billion EBITDA was derived from its iron ore business. This was underpinned by an average iron ore price of US$97.60 per wet metric tonne. According to a note out of Goldman Sachs this week, its analysts are forecasting average benchmark iron ore prices of US$120 per tonne in 2023 and then US$93 per tonne in FY 2024. If this proves accurate, Rio Tinto's iron ore earnings should remain strong in the next couple of years.

Production growth

Also supporting its earnings will be its production growth plans. As well as aiming for modest iron ore production growth in FY 2023, the company has plans to grow its alumina, aluminium, and copper production. Goldman Sachs is expecting the latter to increase 8% in FY 2023 and then 5% in FY 2024. And with the broker expecting strong copper prices in the near term, this can only mean good things for the Rio Tinto dividend.

Broker forecasts

It isn't just me that is expecting the Rio Tinto dividend yield to stay above 6% in the near term. Goldman Sachs has pencilled in fully franked dividends of US$5.33 (A$7.95) per share in FY 2023 and US$5.98 (A$8.92) per share in FY 2024. Based on the current Rio Tinto share price of $121.75, this will mean yields of 6.5% and 7.3%, respectively, for investors.

It is also worth noting that Goldman sees a decent upside ahead for Rio Tinto shares and not just big dividend yields. It currently has a buy rating and a $138.30 price target on them.

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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