Image source: Getty Images
Regular Fool readers will know that I am a loud cheerleader for value stocks. In particular, I love to hunt cheap FTSE 100 stocks that offer cash dividends that outperform the market. By reinvesting these regular dividends, I can reduce the ongoing volatility of my portfolio, or I can use these regular payments to offset my skyrocketing bills.
First of the FTSE 100 shares?
2022 was a brutal year for investors around the world, thanks to falling stock and bond prices. Also, experts expect recessions in the US, UK and Europe this year. But it remains to be seen how wide, deep and prolonged these economic contractions will be. What if we somehow dodged a great depression?
Stock markets are often said to “climb a wall of worry,” so being a long-term investor requires positivity as well as patience. That’s why I’m hopeful about the future prospects of the Anglo-Australian mega-miner FTSE 100. red river (LSE: RIVER).
A global rebound would revitalize Rio
As one of the world’s largest mining companies, Rio Tinto has a market value of £104.2bn, making it a true Footsie super-heavyweight. It is also one of the world’s largest suppliers of aluminium, copper, iron ore and zinc.
These base metals are in high demand during boom times, but metal prices tend to fall during downturns. That’s why even the biggest mining companies sometimes cut their dividends, as Rio last did in 2016.
Elsewhere, former global growth superstar China recently abandoned its zero-Covid lockdowns, as well as improving liquidity for its ailing housing market. Therefore, as the ‘workshop of the world’ opens again, demand for commodities could take off later this year.
Obviously, I could be just as wrong, with slowing global growth hitting mining stocks. Anyway, Rio shares look cheap to me. At the current price of 6,213 pence, they are trading with a price/earnings ratio of 7.1 and a return on earnings of 14.1%. That’s about half as ‘expensive’ as the broader FTSE 100.
In addition, Rio’s excellent dividend yield is 8.5% per year, more than twice that of Footsie. And this cash payment is covered 1.7 times by earnings, giving you a solid foundation for future growth. That’s why I already own this mega-cap stock, and would happily buy more today, if I had the extra money.
Warning: Rio is a volatile stock
Although I am very optimistic about Rio Tinto’s future revenue, earnings, cash flow and dividends, I am well aware of how volatile its shares are.
Based on the current share price of 6,213 pence, these shares are actually 11.3% ahead over the past 12 months. But it has moved in a wide range over the past 52 weeks, from a high of 6,343 pence on March 3 to a low of 4,424.5 pence on October 31. We bought this stock at the end of June at a price of 5,203.7 pence, just before it started to go up and down before rallying strongly since Halloween.
In short, I wouldn’t describe it as one for the faint hearted. But its juicy, but potentially sustainable cash dividend is a big draw for me as a Rio Tinto shareholder.
