Would it make sense to buy Rio Tinto Limited (ASX: RIO) shares for dividends?
In the current environment of record low interest rates I can see why plenty of regular investors would want to find good sources of income.
Investors are drawn to shares like Commonwealth Bank of Australia (ASX: CBA), Transurban Group (ASX: TCL) and Sydney Airport Holdings Pty Ltd (ASX: SYD) for income, but those are crowded shares these days.
Perhaps resource shares are a good place to put your money? I think most people know there are cycles in resources. That's why miners trade at lower multiples of their earnings than most other companies. At the moment Rio Tinto is trading at less than 11x FY20's estimated earnings., but these earnings are less reliable than most.
Since the resources bust in 2016 the Rio Tinto dividend has grown substantially from the $2.11 per share payment. Iron ore prices have been good and demand has remained high from China.
Indeed, in Rio Tinto's September 2019 quarter the company reported growth of its iron ore shipments and production.
Investors aren't expected FY20's profit to be as good as FY19. Even so, one estimate has Rio Tinto paying a dividend of $5.85 per share, which would translate to a grossed-up dividend yield of 9.3%.
The Rio Tinto share price is down 16.5% since the start of July to reflect the lower expectations in the near-term outlook.
Foolish takeaway
In the good times, miners like Rio Tinto are great at rewarding their shareholders. But we're nearer the top of than cycle than the bottom. I don't think it makes sense to buy miners at higher prices when it would probably be better to take a long-term approach and buy when the resources sector is in the dumps again. But that will take bravery.
