FTSE 100 heavyweight Rio Tinto (LSE: RIO) has seen its price ebb and flow alongside China’s economic forecasts since 2020.
Up to that point, the country had been the key global consumer of commodities needed to power its extraordinary growth.
After Covid hit, its extreme policy for handling it – shutting down cities at any hint of infection – crippled its economy.
The signs are that China’s economy is now bouncing back, in my view. Last year it achieved its growth target of around 5% and the same is in place this year.
Manufacturing data in March and April indicated ongoing expansion, which is key to its commodities demand.
This provides a firm footing for continued high dividend payouts from the company in the coming years, I think.
A fundamentally solid company?
A risk, of course, is if China’s apparent economic recovery falters. Another is that the company fails to expand its sales in other key developing markets.
Having said that, even in 2023’s depressed commodities market, it made a profit of $10bn. Underlying earnings were $12bn.
Moreover, it continued to pay good dividends throughout all of China’s relatively economically stagnant period.
Working backwards from 2022, it paid 6.8%, 12.9% (including a special dividend), and 6.8% each again in 2020 and 2019.
In 2023 it paid a dividend of $4.35 (£3.47) a share, which gives a yield of 6.2% on the current price of £55.90.
Big passive income generation?
At this price, just over £10,000 would buy me 179 shares. At a yield of 6.2%, this would make me an additional £8,560 after 10 years.
This is provided that the yield averages the same and that the dividend payments are reinvested back into the stock.
This is called ‘dividend compounding’ and is the same process as compound interest in a bank account. However, rather than interest being reinvested, dividend payments are.
With no change in the yield, after 30 years I could have a total of £63,931, paying me £3,834 a year, or £320 a month.
Bigger returns starting from £0 in the bank
Even better results can be achieved through small but regular investments, even with nothing in the bank to begin with.
Just £5 a day invested in 6.2%-yielding Rio Tinto shares would produce £24,979 after 10 years. This is also provided that the dividends are reinvested back into the stock.
After 30 years on the same basis, the total would be £157,382. This would pay £9,388 a year, or £782 every month in dividend payments!
There would be tax implications according to individual circumstances, of course. And inflation would reduce the buying power of the income.
However, it highlights that a big second income can come from relatively small investments in the right stocks if the dividends are reinvested.
If I did not already own other stocks in the same sector, I would buy Rio Tinto today. It has consistently maintained a high yield and looks set to grow alongside China’s economic recovery.
