Very high dividend yield stocks oh-so tempting. Who doesn’t want 18% income? I know I will. But in my experience, extreme caution is required when buying such shares. The risk of cutting dividends is often higher than normal.
Today I’m going to look at two of FTSE 100’s biggest mines, Rio Tinto (LSE: RIO) and BHP Group (LSE: BHP). These stocks have forecast dividend yields of 18% and 12% for the current financial year, respectively. Should I consider buying these shares for my earnings portfolio?
So how is it going?
Thanks to their huge mines in Western Australia, Rio and BHP are able to produce more iron ore at a lower cost, than anyone else. Most of these raw materials are exported to China. It is used to make steel, often for the construction industry.
When the epidemic happened last year, an amazing thing happened. Since April – as life in China has returned to normal – demand for iron ore has increased. Prices went up. Between April 2020 and June 2021, the price of iron ore rose from about $ 80 per tonne to about ০ 210 per tonne.
During this period, Rio and BHP were producing iron ore at a cost of less than 20 20 per tonne.
You can imagine how profitable it was. BHP’s net profit rose 42% to 11 11.3 billion in the 12 months to June 30. Rio’s net profit rose 119% to .2 17.2 billion over the same period.
Why things are changing
Although strong copper prices have also helped, both Rio and BHP made about 0% of their profits from iron ore last year.
Unfortunately, market conditions are changing. With Chinese property developer Evergrand At the risk of seemingly defaulting on it, the market is concerned that demand for iron ore will decline. If China stops building so much, it could have a significant impact on global demand.
Iron ore prices have fallen 42% to 120 120 a tonne since the end of July. At this level, Rio and BHP are still very profitable. But the profit will be much less than in the summer time, when the price was more than $ 200 / ton.
Dividend Perspective: What Happens Next?
According to the latest unanimous forecast, Rio will pay a total dividend of $ 11.84 per share for 2021. Shares traded at 4,840p, giving a yield of about 17.5%.
BHP is expected to pay 3.06 per share, with a forecast yield of 11.8%.
I suspect this year’s salary will be a little lower than expected. But what really worries me is the outlook for 2022 and 202 for. Until we see an increase in the price of iron ore or possibly copper, my sum tells me that both Rio Tinto and BHP can make it. Lots Pay small dividends from next year.
The broker’s forecast supports this view. The latest estimate I can find is that by 2023, Rio’s dividend will be reduced by 50% to about 80 5.80.
This is a similar story for BHP, whose dividends are expected to fall by about 45% in the next few years to 1. 1.60.
Rio and BHP shares have been falling in recent weeks. But they are still close to historic highs. I think there could be more falls, so I won’t buy any of these FTSE 100 stocks right now.
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Roland Head has no position on any of the shares mentioned. Motley Flower UK has no position on any of the shares mentioned. The opinions expressed in the companies mentioned in this article may differ from those of the authors and therefore the official recommendations we make on our subscription services such as Share Advisors, Hidden Winners and Pro. Here at The Motley Flower we believe that considering a variety of insights makes us a better investor.