We had an out-of-season earnings report delivered to investors this week. This early (or is it late?) report from mining stock and ASX blue chip giant Rio Tinto Ltd (ASX: RIO) was quite the report to read. Investors sent Rio Tinto shares sharply higher upon reading it. That says a lot.
Yes, Rio Tinto released its latest half-year earnings yesterday morning before market open. As we covered at the time, there were many numbers to like in this report. Among those numbers were a 15% rise in revenues to US$31 billion, a 28% improvement in underlying earnings to US$14.8 billion, and a 75% spike in free cash flow to US$3.8 billion.
Not surprisingly, investors sent Rio shares up a healthy 3.67% yesterday, and have continued to push the miner higher so far this Thursday. At the time of writing, Rio is sitting at $167.74 a share. That's up a happy 1.42% for the session thus far.
But let's talk about the dividend that Rio Tinto unveiled. The miner announced that the next dividend it will pay out will be worth US$2.11 per share. That's up a healthy 42.5% from the US$1.48 per share payout Rio shareholders received in September last year.
This latest interim dividend will be paid out on 24 September. That's fter Rio Tinto shares trade ex-dividend next month on 13 August.
So let's talk about whether this dividend show of force makes Rio a buy for income today.
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Rio Tinto shares: A buy for dividend income?
To start off with, let's note that Rio Tinto shares are currently trading with a trailing dividend yield of 3.54%. Saying that, this yield does not yet account for the dividend hike unveiled yesterday. The final amount in Australian dollar terms is yet to be revealed. However, we can pencil in about $3.03 (that's at today's rates).
If we combine that metric with the $3.67 per share final dividend from April, we get to a rough forward yield of about 4.03%.
That's obviously not a yield to turn one's nose up at. Especially with the full franking credits Rio has always offered with its payouts.
However, it is worth noting that Rio, as a miner, can never offer the kind of income stability that investors can expect from other ASX blue chip shares, perhaps Telstra Group Ltd (ASX: TLS) or Commonwealth Bank of Australia (ASX: CBA), with a more stable earnings base.
Rio's profits, and thus its ability to fund dividends, are perpetually at the mercy of volatile commodity markets. This means that although Rio has historically been able to afford massive payouts when prices are high, its dividends can be cut drastically if the market swings lower.
So income investors can certainly add Rio shares to a diversified income portfolio. But this is a company that should never be relied upon to keep its dividends steady.
