This company could be the answer to my passive income goals

Building a passive income through dividend-paying stocks can be a real game changer. I like what I see with this company.

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Investing in the stock market can be a daunting task. But with the right strategy and knowledge, it can also be an incredibly lucrative and sustainable way to build passive income. One business that stands out to me is Rio Tinto (LSE:RIO), a global mining giant with an impressive dividend of 7.5%. In this article, I’ll explore whether this could be my next passive income stream.

Rio Tinto

Rio Tinto is a multinational corporation specialising in mining and processing various metals and minerals. The company operates on a global scale, with a significant presence in Australia, North America, South America, and Europe. Its focus on high-demand commodities makes it an attractive option for investors seeking reliable dividend income. The sector can be volatile, but such materials are needed for a wide range of projects, so the demand can’t be ignored.

The dividend

One of the key factors to consider when investing in dividend stocks is the dividend yield. This metric represents the annual dividend payment per share, divided by the share price. The dividend yield is 7.5%, which is significantly higher than the average yield of the FTSE 100 index (around 3.5%).

The dividend payout ratio is another essential metric to consider, showing the proportion of earnings paid out as dividends. A lower ratio is generally preferred, as it indicates there is more room to grow dividends in the future.

Rio Tinto’s payout ratio of 70% indicates the company can still go further if conditions allow. For me, this suggests there is a long-term plan, and that I can rely on this passive income long into the future.

Is it sustainable?

Obviously, the ability to maintain and grow dividend payments is closely tied to financial performance. If a company cannot meet these expectations, then the future may not be as lucrative as dividend investors are hoping for.

Fortunately, the business has a strong track record of mitigating the risks associated with recent commodity price fluctuations and operational challenges. This focus on a strong balance sheet encourages me that the firm is just as focussed on growth as it is on dividends.

For me, the question comes down to whether the share price can grow much further. A discounted cash flow calculation suggests the company is already about 13% overvalued. As a result, I would be surprised to see an investment outperforming other sectors any time soon. However, that high dividend could well be an attractive feature, as part of a balanced portfolio.

Am I buying?

Investing in Rio Tinto could be an attractive opportunity for building a sustainable and lucrative passive income through dividends. The company’s high dividend yield, strong financial performance, and commitment to sustainability really stand out to me. I don’t see the share price moving too much higher in the coming years. But with a dividend yield at such an attractive level, I’ll be adding it to my watchlist.

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.

Gordon Best 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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