Buying 273 shares of this world-class stock would give me £100 in monthly passive income

Harvey Jones can get a dividend yield of 7.78% from this FTSE 100 stock giving him a healthy monthly passive income.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Couple working from home while daughter watches video on smartphone with headphones on

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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?

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.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Harvey Jones has positions in Rio Tinto Group. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Portrait of elderly man wearing white denim shirt and glasses looking up with hand on chin. Thoughtful senior entrepreneur, studio shot against grey background.
Investing Articles

3 top FTSE 100 value shares I’d buy before August!

These FTSE 100 heavyweight shares have considerable long-term potential. And at current prices, I think they are too cheap to…

Read more »

Investing Articles

Here’s why I’m selling my Lloyds shares to double down on this FTSE 100 stock

Our writer digs into why he prefers HSBC over Lloyds shares right now, despite both performing really strongly in recent…

Read more »

Investing Articles

I’d invest £12,500 in this 1 stock to bag £1K of passive income!

Building a passive income stream through dividends is one of this writer’s biggest ambitions. Here’s how one stock could help.

Read more »

Investing Articles

3 cheap stocks to consider buying for the AI revolution

Investors looking for AI stocks to buy might be worried about high valuations amid current market euphoria, but these three…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Earnings up 20%! But this UK small-cap stock may just be getting started

Are we about to see enduring growth from this UK small-cap business with a rising stock price ahead over the…

Read more »

Investing Articles

1 FTSE 250 stock I’d give a wide berth… for now

One of the worst performers on the FTSE 250 index is a stock that Sumayya Mansoor has decided she won’t…

Read more »

Investing Articles

The FTSE 250 is brimming with potential, especially in stocks like this one

The main Footsie index gets all the attention but its little brother, the FTSE 250, is full of growth potential.…

Read more »

Frustrated young white male looking disconsolate while sat on his sofa holding a beer
Investing Articles

What on earth happened to the Premier African Minerals (LSE:PREM) share price?

The Premier African Minerals (LSE:PREM) share price is down a whopping 85% in the last year, so what happened? Gordon…

Read more »