Rising interest rates have been pushing stock prices down and dividend yields up. As a result, I think that there are some great opportunities to develop my passive income investments.
When I’m looking for stocks to buy, it’s important that I focus on ones that will do better than bonds or savings accounts. Otherwise I might as well have just put my money in the bank.
At the moment, a 10-year UK government bond has a yield of 4.25%. That means that anything I invest in needs to produce more than that over time in order to be worth the risk.
There are a few UK stocks that I think fit the bill. But one in particular stands out to me.
Rio Tinto
Rio Tinto (LSE:RIO) is a slightly complicated dividend stock. Each year, the company pays a base dividend and in most years it also pays a special dividend on top of this.
The reason for this is that Rio Tinto’s earnings are highly cyclical. As a mining company, it makes more money when commodities prices are high and less when they’re low.
As a result, the special dividend is higher in some years and lower in others. The base dividend, however, has risen steadily over a number of years.
Since the special dividend is hard to predict, I’m going to concentrate on the base dividend here. In 2022, that was £5.28 per share.
Today, the Rio Tinto share price is around £50. So that means that the base dividend offers a yield of 10.56%.
That’s comfortably above the 4.25% return that I’d get from the 10-year bond. So I’m expecting to generate good passive income with Rio Tinto stock, whatever happens with the special dividend.
Commodities
The biggest risk with Rio Tinto is that profits will be depressed for a sustained period as a result of low commodities prices. Iron ore and copper prices are already down this year.
But I think that there are some considerations that offset this for an investor like me looking for passive income. The first is that the company has a strong record of dividend growth.
Over the last 10 years, Rio Tinto has increased its (base) dividend every year except for one. And the average annual increase across the decade is around 16.15%.
This means the company doesn’t just increase its dividend when materials prices go up. The price of commodities has fluctuated over the last decade, but Rio Tinto has kept raising its payouts.
Another consideration that offsets the risk is that the current price offers a margin of safety against the 10-year government bond.
A stock to buy
That’s why I think that Rio Tinto shares could be a great passive income option for me. Commodities prices fluctuate, but the company continues to move forward.
At today’s prices, I’d be very happy buying the stock. I see it as one of the most attractive income stocks in the FTSE 100 and there’s certainly a place for it in my portfolio.
