While a high yield is appealing to income investors, the sustainability of shareholder payouts is also of paramount importance, too. As such, many investors may be somewhat wary about buying a slice of Rio Tinto Limited (ASX: RIO) for its dividends, since the mining and iron ore sector is enduring a challenging period.
In fact, iron ore hit a ten-year low earlier this year and with Rio Tinto relying on the commodity for around 90% of its profits such a low price has put downward pressure on its earnings and caused its bottom line to fall by 19.4% last year. And, looking ahead, Rio Tinto's earnings are due to slump by a further 43% in the current year.
Despite this, Rio Tinto's dividend coverage ratio remains well above one and the company's planned dividend increases over the next two years should be relatively affordable. For example, dividend coverage is expected to be 1.2 times this year, followed by 1.3 times next year as Rio Tinto's bottom line is forecast to return to growth. As such, Rio Tinto's present yield of 4.8% (fully franked) looks appealing compared to the ASX's yield of 4.4%
Meanwhile, Wesfarmers Ltd (ASX: WES) is also enduring a challenging period, with increasingly price-conscious shoppers turning to no-frills operators such as Aldi and Costco, with the impact on Wesfarmers being reduced margins and pressure on its profitability numbers.
Despite this, Wesfarmers is expected to increase its net profit at an annualised rate of 9.2% during the next two years, which should allow it to raise dividends by 3.1% per annum during the same time period. This is partly possible due to Wesfarmers' conglomerate structure, which means that it is not wholly exposed to a tough grocery sector.
For example, Wesfarmers has managed to turn around a struggling Coles Group (acquired in 2007) through improving efficiencies and getting a grip on costs. Also, Wesfarmers' diversity is likely to allow it to continue to offer above-inflation dividend increases.
Clearly, Wesfarmers' 4.7% (fully franked) yield is appealing, but National Australia Bank Ltd's (ASX: NAB) is even more so at 6.1% (also fully franked). And, with its recent $5.5bn placing out of the way and planned exit from the UK coming along, NAB appears to be in relatively sound financial shape, with its dividend coverage ratio being a relatively impressive 1.4 times in the current year.
Furthermore, NAB has an excellent track record of dividend growth. For example, over the last five years it has increased dividends per share at an annualised rate of 6.3% and, with inflation having the potential to rise over the medium term due to an increasingly loose monetary policy, a track record of above-inflation dividend increases is a major positive. Furthermore, with a beta of 1.21, NAB should also benefit from any positive impact on the ASX from a falling interest rate, with its shares set to rise by 1.21% for every 1% gain in the wider index moving forward.
