The Rio Tinto Ltd (ASX: RIO) dividend is one of the most popular options out there for income investors.
And it certainly isn't hard to see why!
According to CommSec data, based on the Rio Tinto share price at the time, the mining giant's shares have provided investors with above-average dividend yields over each of the last four financial years. Here are the yields:
- FY 2018 – 9.7%
- FY 2019 – 6.6%
- FY 2020 – 5.4%
- FY 2021 – 14.2%
So far in FY 2022, which ends 31 December, Rio Tinto has declared an interim dividend of approximately $3.84 per share. On a trailing twelve-month basis, this brings its dividends to $10.47 per share.
Based on the current Rio Tinto share price of $105.93, this represents a trailing 9.9% dividend yield.
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Can Rio Tinto's 9.9% dividend yield be sustained?
Rio Tinto is one of the world's largest miners and has exposure to a number of commodities. However, there's no getting away from the fact that iron ore is its biggest contributor to earnings.
In light of this, iron ore price strength (or weakness) has a big impact on its earnings and ultimately the dividends it is able to pay out.
In FY 2021, iron ore EBITDA came to US$27.5 billion thanks to an average iron ore price of US$160 a tonne. That represents approximately 73% of its underlying EBITDA of US$37.7 billion for the period.
Unfortunately, the iron ore futures price is currently fetching US$93.04 a tonne. And while it hasn't traded at this level for the whole of FY 2022, the average price received is still likely to be down meaningfully for the year.
This has been driven by softening demand in China following long lockdowns driven by its zero-COVID policy. And with COVID cases soaring again, demand looks likely to remain subdued in the near term. Particularly given the ongoing property crisis in China, which is a sector that consumes significant amounts of iron ore.
Dividend cut incoming
In light of the above, a note out of Goldman Sachs reveals that it expects Rio Tinto's iron ore EBITDA to fall by over a third to US$17.7 billion in FY 2022. A similarly sharp decline in group EBITDA to US$26.3 billion is also expected.
Unsurprisingly, given this earnings weakness, the Rio Tinto dividend looks unsustainable at FY 2021's levels and a dividend cut is expected.
Goldman Sachs is forecasting the Rio Tinto dividend to come to US$4.80 per share for FY 2022. This equates to $7.20 in local currency at current exchange rates. Based on the latest Rio Tinto share price, this implies a full year dividend yield of 6.8% for investors.
While certainly not as great as FY 2021 or its trailing yield, the Rio Tinto dividend yield still remains among the biggest on the Australian share market.
Goldman Sachs also sees room for the miner's shares to rise further with its buy rating and $114.70 price target.
