I’d buy 266 shares of Rio Tinto stock for £1,000 in yearly passive income

Rio Tinto is set to improve its dividends. Here’s how I’d target a £1,000 annual passive income from buying its shares right now.

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After a period in the doldrums, big mining company Rio Tinto (LSE: RIO) is set to improve its dividend, which may be a decent source of passive income.

City analysts estimate a 13.5% improvement in the shareholder payment for 2024. The total dividend for the year will likely be around 483 cents per share. That’s about 382p with recent currency exchange rates.

The dividend’s growing again

With the share price in the ballpark of 5,381p, the FTSE 100 giant has a forward-looking dividend yield of just over 7% for 2024. I think that’s worth having, especially if the dividend can keep growing in the coming years.

There are risks, of course. Variable currency exchange rates are one. If the pound strengthens against the US dollar, dividends will shrink a bit when converted to pounds and pence.

Another risk is that mining is a highly cyclical activity. The ups and downs of the wider economy can affect the company’s profits. We only need look at the cash flow and dividend record to see that risk playing out:

Year2017201820192020202120222023(e)2024(e)
Operating cash flow per share (Cents)7726839089751556990??
Dividend per share (cents)287297399467781492425483
Dividend growth78.3%3.39%34.3%17.1%67.3%(37%)(13.7%)13.5%

I like the way the figures for operating cash flow are bigger than those for dividends. After all, it takes cash to pay out money to shareholders. But there’s volatility in that table. Those dividend decreases last year and in 2022 will have hurt existing shareholders.

Nevertheless, I’m optimistic about the prospects for the word’s economy in the coming years. My belief is commodity prices will likely be stable enough to support Rio Tinto’s cash flow. The company earns much of its profit from the production of iron ore and the price of that commodity has been holding up well lately.

Cycling back up?

The way the Rio Tinto’s share price has remained within a fairly tight trading range encourages me:

The stock has been moving essentially sideways for the past three years. One of the biggest concerns is that cyclicality might at some point cause a collapse of profits, dividends and the share price.

However, the shareholder payment is rising again, so I’m feeling more comfortable with the stock than before.

We’ll find out more from the company with the full-year results report due on 21 February. Meanwhile, I’d be inclined to dig in with further research now.

With the dividend yield near 7% and the share price around 5,381p, I’d need to buy about 266 shares to collect £1,000 a year in passive income from dividends. That would cost me just over £14,300 – so it’s a fair commitment.

Nevertheless, as part of a diversified portfolio of shares, I’m tempted.

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.

Kevin Godbold has no position in any of the shares mentioned. 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.

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