I’m on the lookout for stocks offering large and reliable dividend payouts. By investing in such shares, I aim to build up an enviable passive income flow.
And I believe Rio Tinto (LSE:RIO) ticks all my boxes when it comes to investing in income stocks.
My three rules
There are three quick-and-easy rules that I apply to separate the wheat from the chaff.
- I ask myself whether the stock pays a dividend that’s at least 50% above the average yield of the index it belongs to. After all, if I could get a similar yield just by investing in a FTSE 100 tracker, for example, I think I’d be safer doing that as I’d get the added benefit of diversification across sectors and companies.
- Once a stock passes that test, I dig deep into its dividend payout history. Here, I’m looking to see if it has been able to consistently pay out such returns to shareholders over the course of a decade or longer.
- Finally, I look at the dividend coverage ratio. I divide the company’s net income per share by its dividend per share. If the net income is more than two times larger than its dividend payout, I feel reassured that the company isn’t resorting to debt or neglecting capital investment to maintain its yield.
A copper-bottomed dividend stock?
Rio Tinto, a multinational mining company, pays out a whopping forward dividend yield of 11.8%. Given the FTSE 100 (the index to which Rio Tinto belongs) yields 4.1%, it’s fair to say the stock is a cut above the rest in the dividend department.
Meanwhile, over a 10-year period, Rio has grown its payout by 158%. Over that period, the annual dividend increased compared with the 12 months prior on seven occasions. That signals to me that Rio Tinto has historically been a reliable dividend payer.
Meanwhile, in 2021 net income per share was £14.90 while its dividend payout was £2, giving it a very comfortable coverage ratio of over seven times.
My calculations
How much would I need to invest to get £100 per month in passive income from Rio Tinto stocks?
The dividend yield is a reflection of the share price, which ticks up and down every second the market is open. Therefore, the amount I’d need to invest to get £100 a month is constantly changing too.
However, using the share price as I write of £45.37 and the implied forward dividend yield of 11.8%, I find I’d need 224 shares.
Given I don’t have £10,170 spare to generate £100 a month from Rio Tinto shares, what could I do instead?
Regular investing
If I started investing £100 per month today, I could achieve my target investment amount in fewer than five years. To get that result, I assume the dividend yield and price stays unchanged and that I put all of my dividend payouts back into buying more shares.
I’ll pull the trigger on that plan starting this month.
Rio Tinto is a solid dividend payer. In addition, I believe demand for the commodities that the company mines will only increase due to population growth and ‘green’ infrastructure projects. However, I must be prepared for volatility, as the prices of commodities like copper and steel tend to plummet when economic times get rough.