Most of my portfolio is dedicated to shares that can give me a passive income on top of what I earn from my own sweat and hard graft.
I bought a small stake in FTSE 100 mining giant Rio Tinto (LSE: RIO) a year ago as the yield hit 10%, only to see the dividend cut by half within months.
Is the income outlook now brighter and should I up my stake?
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Is it time to buy?
The Rio Tinto share price hasn’t exactly been shooting the lights out, rising just 2.79% over the last year. Yet that’s better than it looks. Once I added in the current yield of 7.78%, the total return tops 10%.
Over the last five years it’s done pretty well rising 32.33% (with dividends on top of that). As a comparison, over the same five-year spell, the FTSE 100 grew just 4.49% (plus dividends).
So Rio’s done pretty well considering it’s been hit by the pandemic, China’s malaise, rising interest rates and slowing global economy. Of these, China’s troubles have probably had the biggest impact, as until recently it was consuming more than half of the globe’s total commodity output.
China has been on a massive building and infrastructure spree, but those days are now over. However, the transition to net zero will boost demand for metals and minerals. Plus I reckon the global economy will put on a spurt at some point next year, once interest rates finally peak and start to fall. Markets will move before then. Investors are a forward-looking bunch.
At time of writing, Rio Tinto shares trade at 5,231p. In 2022, it paid a dividend per share of $4.92. Analysts expect that to increase $5.33 in full-year 2023. That’s around £4.40. If I wanted to hit my passive income target of £100 a month, I’d need to buy 273 shares, which would cost me £14,280.
Demand will recover
I’ve had my fingers burned by the Rio Tinto dividend once this year. Can I risk it again? That headline 7.78% yield is a bit misleading. Forecasters expected to drop to 6.38% in 2023 and 6.28% in 2024. I prefer a rising dividend rather than a shrinking one.
Yet a closer look suggests it should be pretty solid. Rio enjoyed a solid third quarter as output climbed in most operations, with its key Pilbara iron ore plan performing well. Only Canadian iron ore production guidance slipped, as it fought back from conveyor belt failures and wildfires in Northern Quebec.
Rio Tinto generated $7bn of cash in the first half of the financial year, which makes that dividend feel a little more secure. As do profits after tax of $5.1bn. The board expects total cash shareholder returns in the range of 40% to 60% of underlying earnings in the longer run, which cheers me up no end.
Rio Tinto is a world-class company in at a bumpy time for the global economy. This makes now a good time to buy, as I can pick up its shares at a lowly valuation of just 7.9 times earnings. I’ll buy the moment I have some cash to spare, and let the passive income flow my way.
