RIO share price in focus
Founded in 1873, Rio Tinto is today the world’s second largest metal and mining company, behind only BHP Group. Rio Tinto is engaged in minerals and metals exploration, development, production and processing.
Rio can be divided into four core business units: Aluminium, Copper & Diamonds, Energy & Minerals and Iron Ore.
Of the four units, iron ore (the primary component in steel manufacturing) is by far the largest export. It’s no surprise then that the performance of the company can be strongly affected by the price of iron ore and other key commodities, making earnings somewhat volatile.
The appeal of ASX Materials shares
The S&P/ASX200 Materials Index (ASX: XMJ) has averaged 3.87% per year in capital growth over the last 5 years. That compares to the ASX 200 index which has returned 3.91% per year over the same period. Let’s take a look at why you might want a materials company like RIO in your portfolio.
Big dividends
While the capital growth goes through good periods, it’s really the dividends that most investors are interested in when assessing materials shares. After all, it’s what they’ve been known for for many years. Over the last 5 years the RIO dividend yield has averaged 6.42% per year.
Aussie materials companies like RIO have developed a good reputation of being reliable dividend payers. However, these are still commodity-driven businesses so the dividends (like the share price) can fluctuate quite a bit.
Growth potential
Mining is one of the backbones of our modern economy and the demand for things like iron ore, copper, and lithium is not going away any time soon.
In fact, the demand for a lot of precious metals is rapidly growing as the economy transitions to renewable energy. A lot of these materials are needed for things like electric car batteries and solar panels. Companies like BHP and Rio Tinto are investing a lot of money to put themselves at the forefront of this oncoming wave of demand.
RIO share price valuation
The S&P/ASX200 Consumer Discretionary Index (ASX: XDJ) has returned 3.87% per year over the last 5 years compared to 3.91% per year from the broader ASX 200. The consumer discretionary sector covers a broad range of goods and services, so it can be hard to compare companies in this group. However, here are a few things you might want to consider when investing in a consumer discretionary company like RIO.
Timing
Consumer discretionary companies usually have their best performance when interest rates are low. Just think about it – when rates are low, you’re more likely to go out and buy those ‘toys’ or things that you may not really need, but you certainly want. That could be new tech, travel, or your new power tools – it all comes under this category.
Despite the current high interest rate environment, RIO has still managed to grow revenue by 6.6% per year over the last three years.
Dividends
The dividends you’ll receive can vary with the current economic environment, but historically many of the big ASX consumer discretionary shares have been reliable dividend payers.
RIO offers a current dividend yield of 5.3% and over the last 5 years has averaged 6.4%.
Familiarity
We’re often advised to invest in what we know. Consumer discretionary shares may be a good fit then, as these tend to be companies that we see on a daily basis and their business model is easy to understand. You probably have a better idea how Rio Tinto Ltd make their money then some niche tech company or a B2B industrials company.
This doesn’t necessarily mean performance will be any good, but they’re definitely easier to get your head around when you’re starting out investing.
