They say there is no such thing as free money, but passive income comes pretty close in my book. It arrives periodically in the form of dividends paid by many stocks, and consequently I am a big fan.
Ultimately, I expend little effort to secure this additional income beyond choosing the stocks.
This income will become increasingly important as I move into retirement. It should enable me to have a better time than might otherwise be the case.
A fixture of my passive income portfolio has been FTSE 100 commodities giant Rio Tinto (LSE: RIO).
So, how much has it made me, and is this likely to continue?
How well’s it done for me?
I first bought the stock back in March 2020, when £10,000 bought me 266 shares at £37.57.
Since then, the firm has paid total dividends per share of £25.33. So, those 266 shares have made me £6,758 in returns.
As with all stocks I buy, I made sure it was trading at a big discount to its ‘fair value’. I do this because if I want to sell the stock, I would prefer to make a profit on it. The chances increase the more a stock is undervalued when I buy.
Anyhow, here the share price has soared 45% to £54.65.
So, that is a profit – on paper, as I have not sold it – of £4,530.
This, added to the dividends, gives me a total gain of £11,268 – a rise of nearly 113% on my investment.
How’s the price look from here?
A discounted cash flow valuation shows the stock is 52% underpriced to its true worth.
Given the current price of £54.65, this means its fair value is £113.85.
Confirmations of this undervaluation come from peer comparisons.
Its 11.4 price-to-earnings ratio is bottom of its competitor group, which averages 29.1. These firms comprise BHP at 15.3, Vedanta at 16.8, Antofagasta at 32.6, and Griffin Mining at 51.8.
It is ultimately earnings growth that powers any firm’s share price and dividends higher. A risk here is commodity price volatility, particularly in iron ore, copper and aluminium.
However, H1 2025 results showed underlying EBITDA at a healthy $11.5bn (£8.7bn). Operating cash flow stood at a colossal $6.9bn, which itself can be a driver for growth.
Moreover, its Q3 production update saw copper and aluminium production rise 10% and 6% year on year. Meanwhile, quarterly iron ore shipments hit their second-highest level since 2019.
What’s the passive income outlook?
Rio Tinto’s current dividend yield is 5.7%, with forecasts that it will increase to 5.9% by 2027, although this can go up or down.
On the current level, my original £10,000 investment would make me £7,659 in dividends after 10 years. This incorporates reinvesting the dividends back into the stock (‘dividend compounding’).
After 30 years of this, dividends would increase to £45,066. Including the £10,000 initial investment, the holding would be worth £55,066.
And this would pay me £3,139 a year in passive income from dividends. None of this is guaranteed, of course, as a company’s situation (and the global backdrop) can change a lot in 30 years.
YetI am very happy to keep Rio Tinto in my passive income portfolio.
And I also have my eye on other high-yield stocks that look very undervalued to me.
