Mining companies like Rio Tinto (LSE:RIO) provide a lot of passive income through dividends. But they’re also notoriously cyclical. Extracting resources from the earth’s crust is at the heart of almost every company’s supply chain. Yet with the balance between supply and demand constantly in flux, resources businesses like Rio tend to deliver quite lumpy results.
Despite this inconsistency, when commodity prices are high, the dividend income can be almost a literal gold mine. Investors saw this first hand in 2021 when the firm paid out a record $9bn to shareholders!
With that in mind, let’s explore how much passive income I would have made to date if I’d bought £5,000 worth of shares in March 2019.
Dividend history
Five years ago, Rio Tinto shares were trading at roughly 4,356p. As such, a £5,000 investment would have fetched around 115 shares, ignoring any transaction fees. The stock has been on a bit of a rollercoaster ride since then. But overall, the market capitalisation stands at 9% higher.
So, I’d still be in the black in terms of capital gains, albeit by a small amount. But the dividends are the real star of the show, so what’s the income been like?
| Year | 2019 | 2020 | 2021 | 2022 | 2023 |
| Dividend Per Share | 382¢ | 464¢ | 793¢ | 492¢ | 435¢ |
Across the last five years, investors have received a total of 2,566¢ or $25.66 in dividends per share. Converting that back to pounds sterling at end-of-year exchange rates equates to £19.62. Multiplying this across my original 115 share position translates into a passive income of £2,256.30 – a 45% return on investment (ROI).
Needless to say, that’s quite a chunky profit, especially when paired with the 9% capital gains from stock price appreciation. But what if I had reinvested the dividends instead of taking them?
The power of compounding
To keep things simple, let’s assume I reinvested all dividends received at the end of each year. How many shares would I have today, and what would my passive income rise to?
| Start | 2019 | 2020 | 2021 | 2022 | 2023 | |
| Total Dividends Received | £0 | £331.23 | £414.03 | £697.37 | £540.89 | £485.20 |
| Share Price | 4,356p | 4,503p | 5,753p | 4,892p | 5,798p | 5,842p |
| Total Shares | 115 | 122 | 119 | 133 | 142 | 150 |
By reinvesting dividends, my total income over the five-year period would grow to £2,468.72 – almost a 10% increase with an additional 35 shares in my portfolio without needing to inject any extra capital. And with more shares, future dividend payments would only continue to amplify the compounding process boosting my returns.
What’s next for the business?
Looking at the latest results, Rio’s surge in profits has unsurprisingly collapsed thanks to its previously mentioned cyclicality, which remains a risk. Investors will get a more up-to-date insight into the group’s 2024 cash flow in the coming weeks following the release of the next production report.
However, there are some early indicators that demand is once again rising. The Purchasing Managers’ Index (PMI) provides some economic insight into the manufacturing sector. Since this industry is a large consumer of raw materials, it can serve as an early indicator of commodity price trends.
While the PMI still signals a contraction due to the ongoing conflict in the Red Sea, it’s steadily been rising over the last six months, with forecasts indicating a return to growth in the second half of 2024. If these forecasts prove accurate, Rio Tinto shares may be worth a closer look for passive income portfolios.
