Passive income investors tend to like the stability and predictability of a steady income stream from their investments. This past week or so has been anything but stable, with the Trump administration’s recent ‘Liberation Day’ tariff announcement, then its reversal, wreaking havoc on the global stock market.
The FTSE 100 Index fell 10.8% in five days to 7,679 points to 9 April before despite a strong rebound on Tuesday (8 April). However, the longer-term picture isn’t as bleak with the UK large-cap index is still up 34% in the last five years.
I think there are some hidden gems that could deliver for passive income investors in the long run. Here’s one of my favourite dividend payers that I’ve been watching closely during the recent volatility.
Resources giant with a juicy payout
Rio Tinto (LSE: RIO) shares have been up and down of late. One big factor has been softening demand for key commodities from China and a subsequent drop in iron ore prices.
The Rio Tinto share price closed down 21.3% compared to the previous 12 months at £41.19 as I write on 10 April, but looks set to jump higher on Thursday after President Trump announced a 90-day pause on his proposed reciprocal tariffs.
Being a dual-headquartered, commodity-based and Australian company, Rio may be able to weather the storm of the recent tariffs. A weaker Australian dollar could make Rio’s key exports more attractive on the global market and help to prop up demand.
Additionally, many analysts are expecting the Trump administration’s tariffs to potentially drive more trade towards China if they come into force. That could well provide the demand boost from the Asian powerhouse to fuel economic growth and require further minerals from the likes of Rio.
Valuation
Mining stocks tend to be quite cyclical and that’s reflected in valuations. For example, Rio’s price-to-earnings (P/E) ratio of 7.4 is less than half the 15.2 average for the Footsie.
Similarly, the company is known as a consistent dividend payer. While the large-cap index has an average 3.8% trailing dividend yield, the mining giant’s 7.5% payout looks attractive.
Of course, cyclicality introduces more risk. If a global recession happens, demand for key commodities like iron ore is likely to decline and that could hit Rio’s earnings harder than those of companies in non-cyclical industries.
The key is to evaluate whether the compensation is high enough for the additional risk. Further escalation of geopolitical tensions, a global recession, or regulatory intervention are all things that could hamper trade and negatively impact Rio’s earnings.
Key takeaway
Given the strong track record of dividend payments, I think Rio Tinto is certainly one that passive investors should consider buying. It looks to be worthwhile on relative valuation metrics and has shown an ability to weather the ups and downs of the commodity and business cycle of late.
While there are risks in buying a cyclical mining stock, I think an allocation to the company could provide a handy boost to a portfolio’s overall yield.
Of course, diversification is key over the medium-to-long term. Having some exposure to a variety of companies and industries is the key to building a long-term passive income that can deliver for investors through market cycles.
