Investing in FTSE 100 dividend stocks offers compelling benefits for those seeking passive income.
With a diverse range of companies spanning various sectors, the Footise provides exposure to established companies with histories of generating consistent cash flows.
Some of these blue-chip stocks come with the advantage of stable dividends. This makes them attractive choices for investors hunting a second income in the form of dividends.
One such company with a long history of generous payouts to shareholders is Rio Tinto (LSE:RIO), currently boasting a dividend yield of 8.5%.
Providing the materials the world needs
The world’s second-largest metals and mining corporation is engaged in the production of materials essential to human flourishing and progress. The group’s business segments include iron ore, aluminium, copper, and minerals.
Operating in 35 countries around the world with 52,000 employees, Rio Tinto has been involved in mining for over 150 years.
Lacklustre financial performance
However, the group’s half-year results underline the ups and downs of life in a complex and multifaceted industry.
Towards the end of July, the company reported a 10% drop in half-year revenue to $26.7bn. Underlying cash profit (EBITDA) fell by 25% to $11.7bn.
In addition, free cash flow fell from $7.1bn to $3.8bn, largely as a result of lower profits.
Overall performance was impacted by lower prices across core commodities as well as higher costs, offset to a limited extent by higher iron ore sales.
This led the board to propose a dividend of $1.77. While this is down 34%, it’s nonetheless in line with the policy of paying out 50% of underlying earnings.
Healthy shareholder returns
Over the years though, Rio has remained very consistent with its shareholder returns policy.
In fact, for the past seven years, the group has achieved a 60% average payout on the ordinary dividend.
This has been made possible by a robust balance sheet that has kept the company in a very healthy position. But with a combination of lower profits and associated cash flows, net debt has risen.
My key concern with lower profits is the negative impact they have on shareholder returns, particularly given that dividends are based on the level of earnings.
A positive future outlook
However, all things considered, the future looks bright for Rio Tinto in my eyes.
I particularly admire the way in which the group is orienting its growth towards what the world needs. For example, by growing the commodities that will help fuel the global energy transition.
To illustrate, the group already has exposure to aluminium and copper and is building exposure to lithium.
These commodities are vital to building products such as solar panels, electric cars, and renewable power generation. And all three are becoming more in demand as the energy transition picks up pace.
As such, if management can deliver this growth while maintaining financial strength and resilience by boosting profits, I think Rio will continue to provide a lucrative long-term passive income opportunity for income investors like me.
If I had any cash to spare, I’d buy some shares in a heartbeat!
