I’d buy 266 shares of Rio Tinto stock for £1,000 in yearly passive income

Rio Tinto is set to improve its dividends. Here’s how I’d target a £1,000 annual passive income from buying its shares right now.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Passive income text with pin graph chart on business table

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

After a period in the doldrums, big mining company Rio Tinto (LSE: RIO) is set to improve its dividend, which may be a decent source of passive income.

City analysts estimate a 13.5% improvement in the shareholder payment for 2024. The total dividend for the year will likely be around 483 cents per share. That’s about 382p with recent currency exchange rates.

The dividend’s growing again

With the share price in the ballpark of 5,381p, the FTSE 100 giant has a forward-looking dividend yield of just over 7% for 2024. I think that’s worth having, especially if the dividend can keep growing in the coming years.

There are risks, of course. Variable currency exchange rates are one. If the pound strengthens against the US dollar, dividends will shrink a bit when converted to pounds and pence.

Another risk is that mining is a highly cyclical activity. The ups and downs of the wider economy can affect the company’s profits. We only need look at the cash flow and dividend record to see that risk playing out:

Year2017201820192020202120222023(e)2024(e)
Operating cash flow per share (Cents)7726839089751556990??
Dividend per share (cents)287297399467781492425483
Dividend growth78.3%3.39%34.3%17.1%67.3%(37%)(13.7%)13.5%

I like the way the figures for operating cash flow are bigger than those for dividends. After all, it takes cash to pay out money to shareholders. But there’s volatility in that table. Those dividend decreases last year and in 2022 will have hurt existing shareholders.

Nevertheless, I’m optimistic about the prospects for the word’s economy in the coming years. My belief is commodity prices will likely be stable enough to support Rio Tinto’s cash flow. The company earns much of its profit from the production of iron ore and the price of that commodity has been holding up well lately.

Cycling back up?

The way the Rio Tinto’s share price has remained within a fairly tight trading range encourages me:

The stock has been moving essentially sideways for the past three years. One of the biggest concerns is that cyclicality might at some point cause a collapse of profits, dividends and the share price.

However, the shareholder payment is rising again, so I’m feeling more comfortable with the stock than before.

We’ll find out more from the company with the full-year results report due on 21 February. Meanwhile, I’d be inclined to dig in with further research now.

With the dividend yield near 7% and the share price around 5,381p, I’d need to buy about 266 shares to collect £1,000 a year in passive income from dividends. That would cost me just over £14,300 – so it’s a fair commitment.

Nevertheless, as part of a diversified portfolio of shares, I’m tempted.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Kevin Godbold has no position in any of the shares mentioned. 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.

More on Investing Articles

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

10% dividend growth! 2 FTSE 100 stocks tipped to supercharge cash payouts

These FTSE 100 stocks have strong records of dividend growth. And they're expected to keep on delivering, as Royston Wild…

Read more »

Investing Articles

Down 17% in a month and yielding 7.39%! Is this FTSE 100 share a screaming buy for me?

When Harvey Jones bought Taylor Wimpey last year he thought this FTSE 100 share was a brilliant long-term buy-and-hold. Has…

Read more »

Investing Articles

Here’s how I’m using a £20k ISA to target £11k+ in income 30 years from now

Is it realistic to put £20k in an ISA now and earn over half that amount every year in passive…

Read more »

Young black colleagues high-fiving each other at work
Investing Articles

If I could only keep 5 UK stocks from my portfolio I’d save these

Harvey Jones is running through his portfolio of top UK stocks to see which ones he couldn't bear to do…

Read more »

Midnight is celebrated along the River Thames in London with a spectacular and colourful firework display.
Investing Articles

I’m aiming for a million buying unexciting shares!

By investing regularly in long-established, proven and even rather dull businesses, this writer plans to aim for a million. Here's…

Read more »

Investing Articles

3 things to consider before you start investing

Our writer draws on his stock market experience to consider a few vital lessons he would use to start investing…

Read more »

Investing Articles

Will this lesser-known £28bn growth stock be joining the FTSE 100 soon?

As the powers that be plan a reorganisation of Footsie listing rules, this massive under-the-radar growth stock could find its…

Read more »

Investing Articles

Fools wouldn’t touch these 5 FTSE 350 flops with a bargepole – how come I own 3 of them?

Harvey Jones took a chance on three struggling FTSE 350 stocks in the hope that they'd stage a dramatic recovery.…

Read more »