One indicator of value is the dividend yield. A high yield is typically telling you two things – either the market knows a company is struggling and the dividend is under threat, or the share price is too low and the dividend is safe.

We think the latter is the case for FTSE 100 diversified mining group Rio Tinto (RIO) and on that basis we think investors should invest now.

Berenberg has done some number-crunching. The investment bank has identified that, when the dividend yield is above 4.5%, then buying the shares has delivered median returns of nearly 30%. Right now, the forecast yield for 2024 based on consensus forecasts is 6.9%.

Obviously Rio is exposed to volatile commodity prices but it is quite conservatively run so it has a strong balance sheet with a net debt to earnings ratio below 0.2 times, having not made lots of risky acquisitions when metals markets were hot. The company also keeps a tight rein on costs.

Undoubtedly this year has been a disappointment for the miners, largely thanks to China’s failure to recover as expected having lifted zero-Covid restrictions. This explains why Rio is trading on a high yield with its shares down more than 16% year-to-date.

However, Beijing is taking steps to revive the economy and with it, more than likely, demand for global commodities given the world’s second largest economy is a rapacious consumer of them. This could provide a lift to prices.

A third-quarter production update revealed Rio Tinto is performing pretty well as it outlined steps to get back to record production levels of iron ore as soon as 2025. Iron ore, through its complex of mines in Western Australia, and aluminium, are its two big revenue generators but it also produces copper alongside various other metals and minerals.

Berenberg analyst Richard Hatch says: ‘Rio has stable production from its business units, as well as growth from lower-risk expansions/new, lower-cost mines in iron ore and in copper, mostly through the ramp-up of the Oyu Tolgoi mine in Mongolia, in which it owns a 66% stake. We also see cost upside in the Pilbara, based on management targets to pull costs lower in this division long-term.’

Unlike the oil and gas sector, which also looks inexpensive and offers high yields, the mining sector in general, and Rio Tinto specifically, have a key role to play in the energy transition so there are fewer question marks about the sustainability of their business.

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