I’m considering Rio Tinto (LSE:RIO) shares for my passive income portfolio. With an 8.5% dividend yield, the mining conglomerate distributes some of the biggest payouts available among FTSE 100 shares.
With enough spare cash, here’s how I’d target a dividend income stream of £300 a year.
A passive income generator
The Rio Tinto share price is £62.18 as I write. That’s a 9% increase on where the stock was at a year ago and I think there’s potential for further share price growth. However, the real appeal of this company in my view is its ability to generate passive income.
To target a £300 annual passive income stream, I’d need to buy 57 Rio Tinto shares. With enough spare cash to buy the shares in one go today, that would cost me £3,544.26. At the current yield, I’d secure a little over £301 each year just by holding my initial investment.
However, I’d also temper my optimism somewhat. Last year, Rio Tinto paid shareholders £14bn in dividends. The possibility of falling metal prices and big capital expenditure plans on new projects mean several analysts expect the company’s distributions to fall this year.
Indeed, dividends aren’t guaranteed and I like to factor potential cuts into my forecasts to avoid disappointment.
The outlook for Rio Tinto shares
Despite some risks to the dividend, there are plenty of reasons I’m bullish on Rio Tinto shares.
One is the expectation that iron ore prices will rise. Goldman Sachs analysts anticipate that prices could surge 20% over the next three months to hit $150 per tonne, lifted by a seasonal boost in Chinese steel production. As the world’s second-largest iron ore producer, Rio Tinto stands to benefit.
I also like the relatively low price-to-earnings ratio of 6.88. On this valuation metric, the shares still look cheap despite trading near an all-time high.
Although iron ore accounts for 65% of the group’s earnings, Rio Tinto continues to expand its mining operations for other commodities. For example, it recently partnered with German carmaker BMW to supply aluminium from its hydro-powered operations in Canada.
In addition, it recently acquired a lithium mine in Argentina. This is a crucial component in electric vehicle batteries. If Rio Tinto can successfully capture market share in this space, it could reap big rewards as government incentives continue to drive a transformation in the automotive sector.
Nonetheless, there are risks too. The company’s no stranger to controversy. Its mining operations have often come in for criticism over the years.
Recently, the firm apologised for losing a radioactive capsule in the Australian outback, although luckily it has since been found by the authorities.
In 2020, the group triggered a shareholder backlash after destroying sacred 46,000-year-old Aboriginal rock shelters at Juukan Gorge. Reputation risks can translate into share price volatility, so I’d bear this in mind when I’m investing in Rio Tinto shares.
My dividend portfolio
Although there are risks, with some spare cash I’d buy Rio Tinto shares as part of my diversified portfolio, and plan to do so this month.
Even if the dividend is cut, the stock will likely still have a higher yield than the Footsie average. Accordingly, I think it should continue to be an excellent choice for passive income.
