I know, I know. After the Twitter debacle, it can be hard to take some things seriously that Elon Musk says about investing these days. So can I take his recent talk about lithium shares seriously?

He was quoted (tweeted?!) bemoaning the high lithium price and the cost impact on his Tesla car production. He went on to encourage entrepreneurs to invest in the “printing money business of lithium mining”.

Now, owning shares in a money-printing machine sounds awesome. But is it really a good time for me to buy any of the top lithium shares?

Why have lithium shares skyrocketed?

I can easily understand where Musk is coming from with his comments. Underlying lithium prices have skyrocketed by 600% this year, driving (pun intended) a 20% price rise for Tesla cars.

That price rise is not going to make it any easier to sell a luxury product into a likely upcoming recession. Hence Musk’s encouragement for more investment.

Potential investors may be further encouraged by seeing rocketing share prices of existing lithium companies. Take Atlantic Lithium (LSE: ALL) for example. It’s up over 75% in the last year alone, despite its recent falls.

Atlantic, along with others, has benefited from that eye-watering price rise, driven by demand vastly outweighing supply.

But can that meteoric rise really continue?

Where’s next for lithium share prices?

There’s a split of opinion (as ever) in terms of where next for lithium share prices. Largely driven by the supply/demand balance for the material, a lot hangs on the timing of new supplies.

On the one side – perhaps unsurprisingly – are the lithium miners. They’re confidently pointing to expected demand growth of electric vehicles continuing to rise rapidly.

But both CitiGroup and Goldman Sachs see extra supply coming through in the next couple of years, which will meet that demand.

Goldman stated: “We forecast all three metals to shift into sustained surplus over the next 1-2 years, which means materially lower price levels, in our view.“

Long-term though, despite tight budgets, it’s hard to see governments turning away from supporting the push for electric cars. So, as a long-term investor, I can see a case for lithium exposure in my portfolio.

Yet are higher-risk small lithium mining shares really my only choice for that?

Spreading the lithium price risk

Before I retired early, one of my many hats was as an energy risk manager. It’s second nature to me to want to diversify.

That’s why I’d prefer to buy Rio Tinto (LSE: RIO) shares than pure lithium miners. As a global mining giant, Rio has both the balance sheet and mining experience that could see it become a major player in this space. Especially if it can sort out the political wrangling over its new lithium mine in Jadar.  

Best though is its natural diversification across other commodities. That makes it a less risky way for me to invest in lithium mining. The roughly 10% dividend yield doesn’t hurt either.

It’s also fallen almost 20% over the last year. That means I don’t feel like I’m buying at the top of the market.

It may not satisfy Elon Musk’s immediate demand, but as a long-term play it’s one I’m far happier to hold.

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Michelle Freeman owns shares in Rio Tinto Plc. 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.

Making regular passive income must be the ultimate lifestyle improvement tip when it comes to finances. It’s no wonder it’s become more popular these days, helping people have that little bit extra money for whatever they want it for.

For me, my dream was to retire early and spend time doing what I love, not just what pays the bills. And it was only through creating enough passive income that I was able to do so.

But, it can be tricky to find the right investments for my portfolio. These are two of my favourites that both play their part in letting me live my life how I choose to.

A growing dividend stable earner

City of London Investment Group (LSE: CLIG) have long been one of my favourite shares that I hold. I first bought this back in 2013 and every year since it’s paid out a chunky dividend. In fact, it’s grown by 9% on average since it started paying a dividend in 2007.

At the moment, it’s still trading down about 15% year to date, giving a historic-based dividend yield of around 7.8%.

If I didn’t already own plenty of these shares in my portfolio, I’d be happy to top up again.

A passive income diversified ETF

Next up, one of my favourite footsie-based ETFs, the not-so-catchily named iShares UK Dividend UCITS ETF (LSE: IUKD).

When I’m looking to live off my passive income portfolio, stability is good. And one way for me to achieve that is through this ETF. That’s because it invests in the top 50 individual high-yielding shares in the FTSE 350 after some basic screening.

If one company runs into issues and decides to cut their dividend, the average dividend yield will fall slightly. That’s much more manageable for me in terms of cash-flow than suddenly receiving nothing.

True, it comes with a slight cost for that benefit, but at 0.4% I think it’s reasonable for what I get.

Currently, it’s returning a potential dividend of around 6%, which I consider pretty good for something with those diversification upsides.

Again, it’s another I’d be happy to add to if I didn’t already own enough for my portfolio.

Playing the long game

At this point, you may be wondering if I’ve simply cherry-picked the passive income investments that have worked out best for me to make this article sound good.

The truth is, no, I own others that worked out better. And there are also those that turned out worse. The honest answer is that not all shares will work out — and that’s okay.

Because that’s why owning a diversified portfolio and holding onto it over the long term was the number one most important thing I did.

It was fundamental for growing my wealth in the first place. And then for turning that wealth into a passive income portfolio I now live off.

After all, I’m all about putting your money where your mouth is. And these tips helped me do exactly that.

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Michelle Freeman has positions in City of London Investment Group and iShares UK Dividend UCITS ETF. The Motley Fool UK has recommended City of London Investment Group. 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.

After all, ‘top’ can mean many things to different people. And frankly, if everybody thought the same way, then trading markets wouldn’t exist!

So, if I’m looking for good shares to buy, in what useful ways can I answer the question?

Does size matter?

When it comes to looking for great shares, is the size of a company important? For example, if I look at the FTSE 100 by market capitalisation, these are the top five shares:

Now, clearly it’s not a static picture, since market capitalisation is linked to a company’s underlying share price. But it’s an easy way to see who are the big boys (and girls) of the FTSE 100.

Why does size matter? Well, if I’m looking for shares that are relatively stable, then these so-called ‘large-cap’ companies are more likely to fit that bill. They tend to be mature companies in established industries.

That makes them potentially less volatile than other smaller shares, with the trade-off being they are less likely to experience huge growth ahead.

But that’s just one way of looking for the top footsie shares — what else can I see?

Highest dividend-yielding shares of the FTSE 100?

Another popular way of looking at the FTSE 100 is to try and find the best dividend payers. One simple way of doing this is to compare historic dividend yields, which gives me this top five list:

The main thing I must remember when looking at these high-yielding dividend shares is that history is far from guaranteed to repeat itself. Many companies cut or cancelled dividends during 2020, for example. Likewise, a high dividend yield can be a warning sign to check the underlying share price isn’t taking an unexpected dive.

Now, dividend shares are useful if I’m looking for income — but what if I’m still trying to grow my wealth?

What are the top five FTSE growers?

As a long-term Foolish investor, I’m interested in buying and holding shares for the next three to five years, at a minimum. And if growth is what I wanted, then these are the top five FTSE 100 shares I would have been delighted to buy five years ago.

These five shares are particularly interesting, since over that period, the FTSE 100 index itself has gone nowhere from a growth perspective.

They look great — unless you compare these growth figures to the wider FTSE 350, where none of these companies would make the top five.

So, what is the answer?

What are my top five FTSE 100 shares?

The most honest, if a little unsatisfying, answer to the question of the top five FTSE 100 shares is – “it depends”. I can ask the question in a variety of ways and get entirely different answers.

That’s why when it comes to looking for shares to buy, I need to be clear on what I’m really looking for — and why. Then I can start to research the best shares for me — and that’s what really matters.

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Michelle Freeman has positions in Shell plc and Rio Tinto. The Motley Fool UK has recommended Diageo, HSBC Holdings, Ocado Group, and Unilever. 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.

The Lloyds share price (LSE: LLOY) hasn’t been that strong for a while. And now it’s down over 15% this year already.

That doesn’t compare favourably to the FTSE 100 fall of just over 2% in the same period.

In fact, while the FTSE 100 has pretty much recovered from it’s pandemic-driven lows, Lloyds shares remain stubbornly below their pre-Covid range of 50p-60p.

And let’s not even get started on looking back to before the financial crash of 2008, when the shares were well above £2.

But does that mean there’s an opportunity for me to pick up Lloyds shares now on the cheap?

As one of most traded shares in the FTSE 100, maybe I should finally be getting in on the act too.

Positive news ahead?

The history of a stock is a useful guide, but the future is what matters. So, when considering which shares to buy for the long term, I look ahead rather than back.

And the future holds some good news from Lloyds’ perspective, with further interest rate rises on the cards from the Bank of England. The next rate decision, due on 4 August, has analysts and markets evenly split between forecasting a 0.25% or 0.5% rise.

Rising rates could continue for a while as the UK and other countries alike try to tame inflation. Higher rates mean higher margins on Lloyds’ main mortgage lending business. That should boost profits and the share price.

But there’s a way to go before we return to the more ‘normal’ 5% interest rate range we saw before the financial crash. So realistically, I think Lloyds shares have far more potential as an income share, rather than a growth share for now.

Can Lloyds be a stable earner?

Long-term shareholders have had a tough time of it. After the dividend was halted in 2008, it wasn’t restarted until 2014.

Since then, it’s not exactly been a dividend aristocrat, but it has at least been paying a dividend. And at current prices, the yield is around 4.5%.

That won’t beat inflation, but it’s comfortably above the 3.8% FTSE 100 average.

So, I could buy now while it’s relatively cheap and hold, just for the income. But I do see some major hurdles ahead for Lloyds.

Long-term challenges

There’s no doubt that banking is changing. As more and more people go for the ease and convenience of online banking, Lloyds needs to evolve.

So far, the wider digital transformation in the sector has focused on simpler accounts. But it’s not difficult to see the big online competitors expanding into cross-selling other more complex products, including mortgages.

That’s why I think Lloyds faces a real threat to the competitiveness of its main mortgage business. Especially with rising interest rates making that business more attractive to rivals.

I think it will come down to how well and how fast CEO Charlie Nunn can implement the new group strategy. It’s something to watch out for.

Am I tempted by the low Lloyds share price?

I can see why, when priced in the low-40s, Lloyds shares can look an attractive income prospect. But I’m not yet convinced about its long-term growth prospects.

I’ll hold fire on buying for now and watch that dividend reliability.

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Michelle Freeman has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. 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.

Now, I’m not fond of buying shares after a such great run. After all, while market timing is not a smart game to play, neither is ‘buy high, sell low’!

But here’s a couple of great reasons why I believe that Centrica’s share price run might not yet be over.

Will Centrica restart paying dividends?

Will it or won’t it restart paying a dividend? We’ll know on Thursday, when Centrica declares its first half results. But certainly the expectation is yes, and that’s got to be a good thing for the Centrica share price.

Like many others, the group, perhaps still better known as British Gas to most, suspended its dividend back in 2020 while pandemic uncertainty was at its highest.

Previously, though, it had been a reasonably consistent dividend payer, with a smooth growth rate throughout 2000–2013:

If things go as expected on Thursday, analysts expect Centrica’s chief exec, Chris O’Shea, to confirm an interim dividend of 1p and a final yearly dividend of around 3p-3.5p.

That would give a forecast yield of around 3.5%. Which while not exceptional, it’s certainly back in contention with other popular shares like Lloyds. But I think there’s even more potential for upside on the Centrica share price.

Can Centrica profit from winter gas price volatility?

It’s hard to escape from the news that this winter could be tough on the energy front. With the Russia/Ukraine war continuing to impact gas prices it’s only going to get tighter as demand goes up later this year.

Previously, energy traders would use gas storage to monetise volatility in the gas markets. The closure of Rough, the UK’s main gas storage facility, back in 2017, pretty much took that option (pun intended) off the table.

The closure was driven by cheap energy prices (remember those?!) and ever-rising maintenance costs making it uneconomical to run. Clearly, it’s a different picture these days, with prices sky-high as Russia continues to threaten to cut gas supplies to Europe.

With a UK Government keen to increase energy security, it will make for an interesting conversation with Centrica on how much they are prepared to pay to help support the reopening of Rough.

Are Centrica shares a risk worth taking?

As with all predictions, they may or may not come to pass. Pressure on the government, whoever ends up leading it, to “do something” may well see more painful decisions for Centrica. It’s not impossible to see rises ahead for the new Energy Windfall tax introduced earlier this year, for example.

But overall, I think there’s some real positive potential behind the Centrica share price for the first time in a long while. I’ll be keeping a close eye on them when it comes to my next share purchase for sure.

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Michelle Freeman has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. 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.

These days it can be difficult to find the money to invest for retirement. As inflation continues to squeeze budgets, it can be tempting to cut back on long-term savings plans. Short-term needs can seem far more compelling.

I get it, we’ve all been there at times, and for me it was especially true when I’d only just started working.

At the same time though, I also had plans to quit the rat race early to be able to travel more. With the average retirement age in the UK being just under 65 years old, I knew I’d have to start investing early to beat that.

Having now retired early in my 40s, these are the two top tips on investing for retirement that really helped make it happen.

Reinvesting dividends for a better retirement

It can be eye-opening to see the impact of reinvesting dividends on market returns. Especially as time goes on and those reinvested dividends start to earn their own returns — the so-called snowball compounding effect.

For example, the FTSE 100 average return is usually quoted as around 7.9%. What people often don’t mention is that includes reinvesting dividends. Without doing that, the average rate drops to around 5.8%.

The difference may sound small, but if I had invested a lump sum of £10,000 back in 1984, the impact today would look like this:

After 10 years, the gap is small at just under £4k. But by the start of 2022, it’s a far more substantial amount at around £95k extra. That’s pretty much twice the final pot size between the two different methods of investing!

That difference comes from the FTSE 100 average dividend level of around 3.5% over the same time period. So imagine how that gap widens when I target dividend shares above that rate.

That could be Rio Tinto, M&G and Persimmon — if invested equally between them, I’d get an average blended dividend rate of around 11.5%. That’s only going to widen that gap with this reinvestment approach.

That’s great — but where I saved my cash mattered too. Time for tip two!

Planning matters when investing for retirement

When it comes to investing for retirement, planning ahead matters.

I’ve always invested in pension schemes first for the tax rebates they offered. But it’s my ISA investments that offer me far more flexibility.

By using a Stocks and Shares ISA, I can invest up to £20k each year free of any capital gains. And now, I’m also able to withdraw a regular tax-free income to fund my early retirement.

If I’d bought those three shares mentioned above, then after just 10 years of maxing out my ISA I’d have about £350k in total, ignoring any capital growth. That would give me a healthy annual tax-free income of almost £40k!

Picking the right investments for retirement

I honestly couldn’t have retired early without using these two tips for investing for retirement. But it’s worth saying that (unsurprisingly) it’s as important to pick the right underlying investments.

Dividend yields are prone to change and inflation needs accounting for — especially these days. But taking the time to research what’s best for my personal risk/reward appetite really paid off.

It’s not always been easy, but these two tips were definitely a big part of helping me achieve my dream retirement.

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Michelle Freeman owns shares in Rio Tinto. 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.

Trust me on this, and I’ll explain why passive income investing is really not all that different from mixing a great cocktail.

How to mix a passive income cocktail (aka portfolio)

When building a portfolio, just like a tasty cocktail, I always want to start with a good mixer. Like a selection of well-diversified ETFs (exchange-traded funds) or investment trusts, with reliable dividend yields.

Then, I’ll want to add the ‘hard-hitters’. These should lift the cocktail flavour, as in the average weighted yield of the portfolio. Here, I’m looking for that magic combination of higher-yielding investments without any red flags.

Lastly, no self-respecting cocktail is complete without the finishing touch — so perhaps a sparkler or lime twist?! In my portfolio, that’s my riskier investment plays that may or may not pay off. This one should never be a main component but it sure can make the whole cocktail go off with a bang!

But what ingredients would I choose for today’s passive income cocktail?

My passive income cocktail recipe

When it comes to creating a great cocktail (or portfolio), it’s the proportions that matter. Get these right, and you end up with something that blends well to make an enjoyable drink, or a great retirement.

But if my cocktail is all sparkle without a reliable base? Well, we’ve all heard shocking Bitcoin stories, for example, not to be recommended.

Get it right and you end up with something like this:

What makes a solid investment base?

For the bulk of my portfolio I’m looking for investments such as City of London Investment Trust. It’s an investment trust containing well-known FTSE names that has grown its dividend for 55 years straight, currently paying about 4.7%.

I’d want to add others of course, since my perfect blend is diversified both geographically as well as across different sector types. But it’s a good example of the kind of reliable passive income investment I’d have here.

Which hard hitters make the grade?

Finding investments with high returns is simple, but it is time-consuming to weed out those with reasons to avoid them.  

Two good examples to include would be perhaps Rio Tinto or an old favourite, City of London Investment Group. Both are high payers with good track records of rewarding shareholders, though Rio can tend to be cyclical.

A passive income twister?

Lastly, the sparkler of the cocktail, as in the high-risk investments of my passive income strategy.

Here, I’m looking for investments such as Polymetal, trading down 85% because of the Russian/Ukraine war. I need to be prepared to end up with nothing, but the reward could be great. Especially if it goes ahead with its dividends.

Finally — shake well (not stirred) — and enjoy!

The benefit of mixing together a passive income portfolio like this is the higher overall yield I hope to achieve.

If all goes well, its time to party! But if some of the higher risk elements fail, then I still have a solid base performance. It’s not all or nothing.

I just need to remember — passive income portfolios should always be enjoyed over at least three to five years — unlike the one to celebrate the weekend!

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Michelle Freeman has positions in City of London Investment Group, Rio Tinto and Polymetal International. The Motley Fool UK has recommended City of London Investment Group. 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.

City of London Investment Group (LSE:CLIG) is not exactly a household name, unlike so many of the more popular passive income investments you read about.

It’s not like a Rio Tinto or Royal Mail, where it’s easier to understand what they do. But it is a long-standing favourite of mine, so let’s introduce it properly.

What does it actually do?

Known for convenience as CLIG, you might first think it’s just like any other fund manager. But there’s one key difference here, in that it specialises in closed-end funds.

Originally focused on emerging markets, it has since widened that scope geographically. That’s alongside including other specialist investment types, like REITs (real estate investment trusts).

Why do I highly rate this passive income payer?

Why I like this particular investment comes down to three main reasons:

Consistency: CLIG first started paying a dividend in 2007 and has never missed a year since, not even through the 2008 financial and 2020 pandemic respective crashes.

I find that very reassuring, and it tells me that management are committed to returning value to its investors.

Growth: Consistently growing a dividend is another trademark of a great passive income investment. CLIG, from its starting dividend of 10p, has grown, on average, around 9% per year.

While it wasn’t always a smooth rise, that’s an overall dividend growth rate I’m very happy with.

Diversification: Spreading your risk is important in any investment portfolio and by investing in CLIG, I can indirectly gain exposure to closed-end funds and REITs globally. As I’m low on those in my own portfolio, this means I’m unlikely to duplicate existing holdings.

Those are all great reasons, but, as ever, there are risks to consider, so let’s get into those now.

What are the concerns with City of London Investment Group?

I see two key risks to assess with this particular investment:

Dividend Cover: CLIG can be seen to have a low dividend cover rate over time. While it usually keeps to around 1.5, it did fall to a mere 1.01 in 2020. Since then, it’s recovered back to 1.19, with management forecasting a return to the 1.5 level.

Changes at the top: Barry Olliff, founder of City of London Investment Group, is due to retire from his directorship on 31 July. With several other board changes at the same time, there’s a risk of a change of direction or lack of focus on delivery.

Do I think City of London Investment Group is a good buy now?

I first bought CLIG back in 2013, at the now bargain-seeming price of £2.58p. Since then, alongside that consistent passive income stream, it’s risen to well over £5 at times.

Recently, like many shares, it’s fallen from those highs – down about 15% this year, to around £4.20p. At that price it’s now offering a healthy 7.5% dividend yield.

And while market-timing is not a game I play, I have taken the opportunity to add to that original purchase.

Because as a long-term Foolish investor, I want exactly the kind of passive income investment it offers. And I see no reason for that not to continue for several years yet.

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Michelle Freeman has positions in City of London Investment Group. The Motley Fool UK has recommended City of London Investment Group. 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.

As a long-term dividend shares investor, I’m a firm believer that it’s far easier to save your hard-earned cash when you have a purpose for that money.

For some people, that might be as simple as wanting a better standard of retirement. For others, it’s perhaps a safety net for quitting an unloved job.

As for me, I’m an avid explorer, and suspect I will be for a long time yet. So, the idea of investing in dividend shares to pay for my travels had me hooked from the start.

How do dividend shares pay for my holidays?

The theory of using dividend shares was pretty simple. I planned on investing in enough shares so that the total dividend payments would pay for my travels. And since I wouldn’t touch the underlying investments, they would continue to do so each following year.

So, I started saving money each month, and buying good quality dividend-paying companies. It wasn’t always easy to find the money to save or to know which shares to pick.

And undeniably, it was hardest at the start, when I was saving hard but not seeing much happen. But as any Fool knows, investing is very much a long-term game. It all became far more interesting when the numbers started to add up after a few years.

These days, my dividend portfolio produces enough cash to pay for my trips away every year — now that was worth saving for!

What makes a good dividend portfolio?

When assessing what investments to include in my dividend portfolio, I have a few simple guidelines I look to follow.

• Consistency — are there any gaps in the payment history?
• Growth — are dividends increasing steadily over time?
• Diversification — will this investment help diversify my portfolio?

Following these principles, I now own a wide range of income-paying investments. Usually, I like to have between 10 and 15 different assets. And in that group I have both individual shares, like BP, alongside dividend-focused ETFs such as S&P Euro Dividend Aristocrats.

Why is it so important to have a range? Well, dividends are not guaranteed. But, if a company does cut its dividend, the average dividend yield on my portfolio will fall less when diversified than if I only own one or two shares.

But how did I know how much I needed to save?

How much do I need to have invested?

When working out how much I needed to have invested, it’s the average dividend yield of my portfolio that matters.

For example, my original investment portfolio has grown over time to have an average dividend return of around 10%. That means that if I have £40k invested, the equivalent of two Stocks & Shares ISAs, I will likely generate around £4k each year.

Even with inflation and the cost-of-living challenges, that still gets me a good break away to somewhere warm and sunny.

It’s not completely work-free and I still need to re-evaluate each position regularly. I like to read a diverse range of share analyses, like at The Motley Fool. That means I can swap out any under-performers for better quality investments.

That effort all seems entirely worthwhile when I’m walking down the beach towards a chilled beer. Now that’s happy travels!

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Michelle Freeman has positions in BP and SPDR S&P EURO DIVIDEND ARISTOCRATS ETF. 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.

But that fall hides the fact that some shares lost a lot more than others, some for good reasons. But often these days I’ve found that share prices can tend to overreact to any news.

That’s largely because markets are short-term-focused in nature — and that can create buying opportunities for a long-term investor like me.

Looking beyond today’s news

So last week, when I saw one of the highest-dividend shares of the FTSE 100, Rio Tinto (LSE:RIO), trade down over 10%, I knew I had to figure out if it was a short-term problem or long-term opportunity.

What was driving the change — and did I think it was reasonable? Was it perhaps finally a long-term buying opportunity?

Why did Rio fall more than the FTSE 100?

Rio Tinto may be a global mining giant but it has a fairly concentrated risk exposure, with about 60% of its earnings currently derived from iron ore.

Other FTSE 100 constituents have far less exposure to this particular market. So when iron ore prices fell sharply last week, mining shares including Rio Tinto, fell in line with the sell-off, while other shares were unaffected.

Digging into the story further reveals that Chinese demand is the key driver behind iron ore prices, as it’s the biggest buyer, accounting for about 70% of the market.

So markets were correctly reacting to China’s decreasing steel mill production figures, combined with concerns that its strict policies on Covid will continue to dampen demand.

Taking the long-term view on Rio Tinto

However, when I looked at the same information from a long-term perspective, that’s when I saw my opportunity.

I believe that eventually China will figure out a way to live with Covid, like the rest of the world is slowly doing. Plus, commodity markets tend to be highly cyclical — meaning that what goes up will come down and vice-versa.

I’d never buy an oil company when oil prices are at record highs. But buying a high-quality mining company when its core product falls in price — that makes sense to me as a long-term investment.

That’s especially the case for one with a great track record of rewarding its investors with a healthy dividend rate. At a yield of over 12% at time of writing, it’s the highest-paying dividend share in the FTSE 100.

A bumpy ride ahead?

Mining shares are known for being volatile. That means I’m not expecting a smooth ride while owning my new Rio Tinto shares.

For starters, I will not be surprised if that dividend is cut as revenues fall. But even if halved, that still beats the Footsie’s average of around 4%.

Plus, I like the strategy I can see unfolding at Rio with it developing new markets for its other products. That’s going to help decrease its reliance on iron ore prices and China over time and diversify my risk.

I may have to wait, of course. But over the long-term, I think it should prove a great addition to my diversified portfolio. That’s why I bought this FTSE 100 faller last week.

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Michelle Freeman owns shares in Rio Tinto Plc. 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.