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Most of my portfolio is dedicated to stocks that can provide me with passive income on top of what I earn from my own sweat and hard work.
I bought a small stake in FTSE 100 mining giant Rio Tinto (LSE:RIO) a year ago, when the yield hit 10%, only to see the dividend halved within months.
Are income prospects more promising now? Should I increase my participation?
Is it time to buy?
Rio Tinto’s share price hasn’t exactly soared, rising just 2.79% over the last year. However, that’s better than it sounds. Once I added the current yield of 7.78%, the total return is over 10%.
Over the last five years it has done quite well, increasing 32.33% (in addition to dividends). For comparison, over the same five-year period the FTSE 100 grew just 4.49% (plus dividends).
So Rio has done quite well considering it has been hit by the pandemic, China’s unrest, rising interest rates and the slowdown in the global economy. Of these, China’s problems have probably had the greatest impact, as until recently it consumed more than half of the world’s total raw materials production.
China has been on a massive construction and infrastructure spree, but those days are long gone. However, the transition to net zero will boost demand for metals and minerals. Additionally, I believe the global economy will accelerate sometime next year, once interest rates finally peak and begin to fall. Markets will move before then. Investors are a group that looks to the future.
At the time of writing, Rio Tinto shares are trading at 5,231 pence. In 2022, it paid a dividend per share of $4.92. Analysts expect it to rise by $5.33 in all of 2023. That’s around £4.40. If I wanted to reach my passive income target of £100 a month, I would need to buy 273 shares, which would cost me £14,280.
Demand will recover
Once this year I burned my fingers on Rio Tinto’s dividend. Can I risk it again? That 7.78% overall yield is a bit misleading. Forecasters expected it to fall to 6.38% in 2023 and 6.28% in 2024. I prefer a growing dividend to a decreasing one.
However, a closer look suggests it should be pretty solid. Rio enjoyed a strong third quarter as production increased across most operations, with its key Pilbara iron ore plan performing well. Only Canadian iron ore production forecasts fell as they fended off conveyor failures and wildfires in northern Quebec.
Rio Tinto generated $7 billion in cash in the first half of the financial year, making that dividend look a little safer. As did after-tax profits of $5.1 billion. The board expects total cash returns to shareholders in the range of 40% to 60% of underlying earnings over the long term, which makes me very happy.
Rio Tinto is a world-class company at a difficult time for the global economy. This is a good time to buy as I can acquire its shares at a low valuation of just 7.9 times earnings. I will buy the moment I have some cash to spare and let the passive income flow to me.
