It was a really good 2021 for FTSE 100 dividends. And it appears like this is going to be another great year too! Not only are total dividend payouts expected to be higher, a number of stocks will continue to offer pretty good dividend yields. Of these, at least three stocks are likely to yield 10%+ yields as per recent research by AJ Bell.
Miners stay strong
Surprisingly enough, though, these will continue to be the commodity biggies Evraz (LSE: EVR), BHP, and Rio Tinto (LSE: RIO). At first glance, this was counter-intuitive to me considering that industrial metal prices are expected to correct this year, which in turn is likely to impact these companies’ performance. Still, Evraz is expected to yield a huge 17%, with BHP and Rio Tinto behind but still strong at 10.6% and 10%, respectively.
The question for me is if I would buy them now. It turns out, that of the three, BHP will get delisted from the London Stock Exchange this year, so that is as far as the story for that stock goes. That leaves me with Evraz and Rio Tinto. I already hold both stocks in my investment portfolio, and have been quite happy in the past with their payouts. I mean, what is not to like about double-digit yields?
Is this FTSE 100 stock any good?
But, if I had to buy more of their stock, would I do so? I could, but not for the dividends. This is because I think they are fraught with risk, especially that of Evraz. As the AJ Bell report itself points out “Forecast of yields of more than 10% may make investors a little wary, given the shocking record of firms previously expected to generate such bumper returns, including….Evraz…”. In the past decade alone, Evraz has cut dividends four times. Essentially this means that I should take the forecasts with a pinch of salt.
Another dividend stock to consider
However, I am a bit more optimistic about Rio Tinto. The company has cut its dividend just once in the last 10 years. And it also has a slightly better dividend cover of 1.4 times compared to Evraz’s 1.3 times. Dividend cover is calculated by dividing the company’s earnings by its dividends. It helps to gauge how safe the dividends are. The bigger the cover, the more likely it is that they can be sustained and vice-versa. Ideally the cover should be around 2 times, which means that both the miners have less cover than desirable. Still, of the two, Rio Tinto’s is at least a shade better.
Also, in relative terms, it is a slightly cheaper stock than Evraz. It has a price-to-earnings (P/E) ratio of 6.4 times, while Evraz is at 7.9 times. This means that my investments in it could have a better potential to grow. That said, I will decide whether or not to buy more of them depending on their next updates. If their performance and outlook are positive despite expectations for commodities as such, that might be a reason to load up on them. But for now, as far as commodity stocks go, I’d much rather buy this one.
Manika Premsingh owns Evraz and Rio Tinto. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
