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.

1. 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.
2. 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.
3. 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.

I think selecting dividend stocks from the FTSE 100 is a good idea as dollar-denominated stocks are costly right now. Of course, if the pound never recovers against the greenback, I might regret having focused on the UK stock market.

But I’ve found the two stocks on the FTSE 100 with the highest forward dividend yields. How confident am I that these juicy payouts are sustainable?

Safe as houses?

Persimmon (LSE:PSN), a housebuilder headquartered in York, pays the highest forward dividend yield on the FTSE 100 at 19.3%. In its half-year results for 2022, the company boasted of “strong demand” in the sector, with 6,652 new homes completed in the six months to 30 June.

But is the company a reliable dividend payer?

Leafing through Persimmon’s historical dividend payouts, I find that from 2016 to 2022 the dividend has been consistent and growing, from 110p to 235p.

It was a similar pattern from 2001 to 2007 when the Persimmon dividend grew every year, from 12.8p to 51.2p.

On the other hand, 2009 to 2015 was a bleak dividend winter for shareholders, with an average payout of 1.2p a year and four years when the figure was zero.

Housing is a boom-and-bust sector, and I fully expect Persimmon to cut its dividend when the next crash comes. With mortgage borrowing costs rising and inflation cutting into people’s disposable income, I don’t think the next housing bust is far away. I’ll be avoiding Persimmon shares.

Sitting on a copper mine

Rio Tinto (LSE:RIO), a multinational mining company, pays the second-highest dividend yield on the FTSE 100 at 12.3%. From aluminium to iron ore, copper, uranium, and diamonds, Rio Tinto’s £60bn revenue in 2021 is well diversified across a broad basket of commodities.

Unfortunately, Rio Tinto’s low price-to-earnings (P/E) ratio of five isn’t the screaming buy signal I might assume it to be. Companies in cyclical sectors (like mining) tend to show their lowest P/E ratios just at the top of the cycle. That’s because earnings swell as the price of the commodities they sell skyrocket.

It’s true that high interest rates and Covid lockdowns in China have already conspired to drag down commodity prices in 2022. However, I suspect they might have further to fall if major economies dip further into recession in 2023 and 2024 than currently expected.

Still, Rio Tinto’s dividend history doesn’t tell the same famine-and-feast story as that seen with Persimmon.

It’s true there have been occasional years since the turn of the millennium when the dividend rose and fell precipitously. However, taking a three-year moving average of Rio Tinto’s dividend payments from 2000 to 2020 shows a fairly smooth line of consistent growth.

I plan to add Rio Tinto to my portfolio, because I’m bullish on what the ‘green revolution’ and population growth mean for commodity demand long term. In addition, the dividend payment is well covered by earnings.

Right now, the FTSE 100 index offers an estimated income yield of around 4.2% a year. Earlier, I found dozens of Footsie dividend shares with yields higher than this. Here is one of these top high-yielding stocks that I already own, but would gladly buy at current prices.

Rio Tinto is top of my dividend shares

Rio Tinto (LSE: RIO) is one of the world’s largest mining companies. Indeed, this Anglo-Australian mega-miner is a Goliath of the London market, with a current market value of £76.6bn. However, this share price has declined steeply since hitting a 52-week high of 6,343p on 3 March. Here’s how this Footsie share has performed over seven different timescales, based on the current share price of 4,660.5p:

Though Rio’s share price has declined in 2022, it’s almost exactly in line with the wider FTSE 100’s fall this calendar year. But what drove me to buy Rio Tinto shares earlier this year was their massive dividend yield.

At the current share price, Rio stock trades on a lowly price-to-earnings ratio of 4.8 and a bumper earnings yield of 20.7%. What’s more, the group’s huge free cash flows allow it to funnel chunky dividends to its shareholders. As a result of the above price falls, Rio’s dividend yield has soared to 11.3% a year — one of the highest on the entire London Stock Exchange.

One reason for Rio’s declining value is that commodity prices, having soared in 2020-21, have pulled back steeply this year. One major contributing factor is the slowing Chinese economy, which has been hit hard by a property crisis and zero-Covid lockdowns. This has driven down the prices of key metals such as aluminium, copper, iron ore, and zinc — hardly ideal for big miners like Rio.

Also, demand for metals could suffer in 2022-23 if the global economy slides into recession. Soaring household bills and energy prices have hit Western consumers hard. Also, interest rates are rising worldwide and threaten to send housing markets into reverse. All of this spells bad news for commodity producers.

I’d buy more Rio Tinto shares today

My wife and I already own Rio Tinto stock as part of a new mini-portfolio of 10 dividend shares we built during the summer. However, I’d happily buy more Rio shares today, principally to collect their mouth-watering dividend income. But company dividends are not guaranteed, so they can be cut or cancelled at any time. Indeed, Rio cut its dividend in 2016, during the last commodity crisis.

As a long-term investor, my goal is to hold this and other dividend-generating stocks for, say, 10 years or more. Though I expect the Rio Tinto share price to be volatile over the coming decade, I’m hoping for outstanding returns from this dividend stock in future!

Despite this, it’s a method that’s more challenging to implement than it appears, as selecting the right stocks is crucial. I’ve found that it requires a great deal of discipline and patience to wait for the right opportunity. This usually occurs when the market neglects high-quality companies. That means a current share price no longer reflects the actual value of a business.

The Buffett approach

Due to the research-heavy initial approach used by Buffett, this isn’t the most exciting form of investing. Furthermore, once a high-quality company is identified, I must resist the urge to purchase until the price is out of sync with its strong fundamentals.

For this reason, I like to automate this process of finding and assessing a Buffett-style company by using market screeners. This will notify me when a company with the characteristics I want enters a suitable price range and thus could be of interest.

My Warren Buffett-inspired filter has highlighted Rio Tinto (LSE: RIO) as a potential opportunity. The company is a diversified global miner, focusing primarily on iron ore, aluminium, copper and minerals. The share price has been relatively static over the last few years, following an initial rise of 21.5% in 2020, a fall of 10.6% in 2021, and just over a 3% decline this year.

Core characteristics

Within my filter, I’m looking for companies that have consistently grown earnings and achieved a steady increase in profit margins. In addition, I want companies to have relatively low levels of borrowing, and plenty of positive cash flow. Unsurprisingly, Rio Tinto has these core characteristics. The company has impressive earnings efficiency on invested capital, and a strong ability to generate cash from operations.

Dividend earning potential

In addition, the company is paying a dividend yield of 12%, although this is forecast to decrease to 10.1% next year. Despite the decline, this is still considerably higher than the index average of 3.7%.

It has also paid a dividend consistently for the last 12 years and has grown the dividend for the previous five. This is very encouraging, and consistent dividends are a core requirement for Buffett. This is due to the stable investment returns potential of the company via dividends.

But it’s important to note that currently low share price multiples may be somewhat justified. A fall of 14.3% in turnover is forecast next year, and earnings per share are set to drop by a considerable 32.7%. In addition, the forecast dividend reduction is another sign that underlying performance may be about to decline significantly next year.

Nonetheless, I believe the company represents an excellent long-term investment opportunity and aligns with the Warren Buffett investing style. Therefore I’ll add Rio Tinto to my portfolio next year once I have the necessary funds for the purchase.

Here are two I’ve bought to hang onto for the next 30 years. I think they both offer excellent value for money.

Mining mammoth

Commodities stocks can prove to be volatile investments over a short time horizon. Demand for their products can sink when times get tough and so can their profits.

But over the longer term, companies like mining stocks can be excellent investments. Take Rio Tinto (LSE: RIO), for example. The company’s share price has soared a colossal 880% during the past three decades.

Of course, during any period of prolonged price weakness, shares prices of commodity miners can topple. And their ability to pay decent dividends can also be compromised. This could become a serious problem for my passive income.

Strength in depth

Look around you. Everything you own is loaded with commodities. The car you drive, the house you live in, even the mobile or laptop you’re using to read this article.

These raw materials are needed in increasingly large quantities as the global population increases. This in turn allows miners like Rio Tinto to generate exceptional long-term profits growth.

This particular mining stock produces a vast range of essential commodities. Copper is used in everything from wind turbines and fridges, to coins and gas pipes. Iron ore is an essential ingredient in steel, and aluminium is consumed in vast quantities for cars and soft drink cans.

Rio Tinto’s exposure to many commodities protects it from weakness in any one market. Its operations can also be found in 35 countries, as the map above shows. This provides it with further strength through diversification. At group levels this protects profits from factors like extreme weather events and rising political risk in certain nations.

I thought Rio Tinto shares were too cheap to miss when I bought them in the summer. And today I think they still offer terrific all-round value for money.

Today the FTSE 100 firm trades on a forward price-to-earnings (P/E) ratio of six times. It also sports an enormous 9.9% dividend yield.

Energy giant

Stocks like The Renewables Infrastructure Group (LSE: TRIG) are providing an increasingly essential service. Population growth means increased energy demand. At the same time, the climate crisis means that countries are having to wean themselves off dirty fuels like oil, gas, and coal.

The Renewables Infrastructure Group is helping to soothe this problem. It has invested in solar and wind power assets across Europe. It is also increasing its exposure to the battery storage sector and last month agreed to develop three more battery assets in the UK.

Profits at firms like this are at risk from unfavourable weather conditions. So The Renewables Infrastructure Group has built a wide geographic footprint to reduce the risk from localised weather patterns.

This renewable energy stock trades on a P/E ratio of 5.8 times for 2022. And its dividend yield sits at a healthy 5.5%. Its why I plan to hold this particular UK share for the long haul.

A green revolution supercycle

Rio Tinto is the world’s second largest miner. Many of the commodities it mines – such as iron ore, copper, and lithium, a crucial component in EV batteries – are absolutely essential for the transition to a low-carbon economy.

This is because the reality of the green revolution is that we’re going to have to mine more of the Earth’s raw materials than ever to build out the infrastructure for a zero-carbon economy. Wind turbines, for example, are predominantly made of steel, which is made from iron ore. Three tonnes of copper are needed for a single 1-megawatt wind turbine.

Copper is also the primary conductor in the world’s electrical infrastructure, so contributes directly to the electrification of transport. Electric vehicles (EVs) have a copper intensity three-to-four times higher than traditional vehicles.

So, going green should drive demand for Rio Tinto’s raw materials for decades to come.

Risk of a global recession

On a daily basis, the Rio Tinto share price is often influenced by the changing market price of commodities and forecasts for the world economy. A global recession would certainly reduce demand for the company’s commodities, resulting in fewer construction projects and reduced steel mill activity.

The price of iron ore has been going down over the last few months as demand in Asia cools off. China accounts for more than half the world’s steel production, so a slowdown in the Chinese economy isn’t great news for Rio Tinto.

Drop in profits

The dividend yield is due to fall next year after the company announced a reduction in its payout. This is because soaring inflation has hit profits this year. In its half-year trading update, the firm reported that free cash flow dropped by 30% year-on-year to $7.14bn, while sales revenue decreased to $29.7bn from $33bn.

However, Rio Tinto still had a $291m net cash position. Even after the cut, the prospective yield would still be higher than the FTSE 100‘s average of 4%. Still, that cut to the dividend shows how risky it can be when yields get too high.

A better alternative?

I think a better alternative for me lies in the BlackRock World Mining Trust (LSE: BRWM). Buying shares of this trust means I’m instantly invested in dozens of global mining companies. The managers run the portfolio on my behalf (for a small fee), giving me exposure to basically every mineral and material on the planet.

Rio Tinto is also its fifth largest holding, so I’d still stand to benefit if the company does well. The cherry on the cake is the dividend, which yields around 7%.

Of course, mining companies operate in the same global economy as Rio. The problems that led to its dividend cut could also impact the companies in the trust. So this isn’t an investment without risk.

However, the uncertainties in the global economy lead me to favour the trust over Rio Tinto today. I like its diversification and I’m looking to add it to my portfolio.

Running a car-making company is fraught with challenges that most fail to overcome. Just look at what happened in the early 1900s. There were once over 2,000 automakers in the United States. And in the space of two decades, that dwindled down to less than 50.

And it seems this pattern is re-emerging. In the last couple of years, hundreds of new electric vehicle start-ups have materialised. Yet despite many brands gaining popularity, it’s difficult to discern which ones will end up on top.

But by investing in the companies that enable the electric vehicle industry to exist, this high failure risk can be bypassed while still capitalising on the rise of electric vehicles. I’m talking specifically about battery metal producers.

FTSE 100 shares powering electric vehicles

Two of the biggest mining groups in the world are Rio Tinto (LSE:RIO) and Glencore (LSE:GLEN). And both serve a critical role in producing the materials required for lithium-ion batteries.

Rio Tinto has begun ramping up its investments in lithium mining. Meanwhile, Glencore is already the global leader in supplying cobalt, copper, and nickel. And it’s not just the batteries that are resource intensive. Additional components like the motor and other internal electronics also require these increasingly precious materials.

An investigation commission by the International Copper Association found that a standard internal combustion engine vehicle requires an average of 23kg of copper to function. By comparison, a battery-powered electric vehicle needs 83kg – 260% more. And similar trends exist for the other materials as well.

This surge in demand is only exacerbated by the rapidly rising number of companies operating in the EV space. And when slapping on supply chain disruptions courtesy of the pandemic, it’s not surprising to see the price of these materials explode recently.

Since mining is a largely fixed-cost operation, both of these FTSE 100 shares have outperformed their parent index.

Understanding the risk

Surging revenues and profits today are a pleasant sight. But it’s not a guarantee for the future. After all, Rio Tinto and Glencore are hardly the only mining companies out there.

With commodity prices rising, the economic viability of mining projects worldwide is improving. As this encourages additional mining activity, it’s likely that supply will eventually catch up to demand and may even surpass it. When this inevitably happens, the price of battery metals will naturally decline, taking the impressive earnings of these FTSE 100 shares with them.

The cyclicality of the mining industry is well known. And some analysts believe that we’re already near the top of a commodity cycle – a risk that ought to be considered.

However, given the long-term demand for these metals continues to grow today, that’s a risk I feel might be worth taking for my portfolio. While I’m not looking to buy these shares today, I think this is a smarter way to capitalise on the electric vehicle revolution. As such, I’m keeping a close eye on both of these businesses.

When I’m looking for stocks to buy, it’s important that I focus on ones that will do better than bonds or savings accounts. Otherwise I might as well have just put my money in the bank.

At the moment, a 10-year UK government bond has a yield of 4.25%. That means that anything I invest in needs to produce more than that over time in order to be worth the risk.

There are a few UK stocks that I think fit the bill. But one in particular stands out to me.

Rio Tinto

Rio Tinto (LSE:RIO) is a slightly complicated dividend stock. Each year, the company pays a base dividend and in most years it also pays a special dividend on top of this.

The reason for this is that Rio Tinto’s earnings are highly cyclical. As a mining company, it makes more money when commodities prices are high and less when they’re low.

As a result, the special dividend is higher in some years and lower in others. The base dividend, however, has risen steadily over a number of years.

Since the special dividend is hard to predict, I’m going to concentrate on the base dividend here. In 2022, that was £5.28 per share. 

Today, the Rio Tinto share price is around £50. So that means that the base dividend offers a yield of 10.56%.

That’s comfortably above the 4.25% return that I’d get from the 10-year bond. So I’m expecting to generate good passive income with Rio Tinto stock, whatever happens with the special dividend.

Commodities

The biggest risk with Rio Tinto is that profits will be depressed for a sustained period as a result of low commodities prices. Iron ore and copper prices are already down this year.

But I think that there are some considerations that offset this for an investor like me looking for passive income. The first is that the company has a strong record of dividend growth.

Over the last 10 years, Rio Tinto has increased its (base) dividend every year except for one. And the average annual increase across the decade is around 16.15%.

This means the company doesn’t just increase its dividend when materials prices go up. The price of commodities has fluctuated over the last decade, but Rio Tinto has kept raising its payouts.

Another consideration that offsets the risk is that the current price offers a margin of safety against the 10-year government bond.

A stock to buy

That’s why I think that Rio Tinto shares could be a great passive income option for me. Commodities prices fluctuate, but the company continues to move forward.

At today’s prices, I’d be very happy buying the stock. I see it as one of the most attractive income stocks in the FTSE 100 and there’s certainly a place for it in my portfolio.

Rio Tinto

Rio Tinto’s (LSE: RIO) share price has slumped as commodities prices have come under pressure. This particular FTSE 100 stock produces a wide range of raw materials including copper, aluminium and lithium. But it generates around 75% of group earnings from iron ore.

This creates significant danger as worsening demand and supply dynamics for the steelmaking ingredient depress prices. Iron ore shipments from Brazil, for example, jumped 8.7% year on year in September to two-year highs. Meanwhile, demand for the material is slipping as Asian steel mills curtail production.

Prices of Rio Tinto’s key commodities are in danger of severe cooling moving into 2023. But from a long-term perspective, I believe Rio Tinto’s profits outlook remains super attractive.

The company’s wide range of commodities give it exposure to several white-hot growth sectors. This in turn could power profits — and consequently shareholder returns — through the roof.

Copper and lithium demand should soar over the next decade as electric vehicle build rates pick up. Borates sales could rocket as sectors like consumer electronics, agriculture and construction grow. And its iron ore operations should benefit from urban-related construction in developing markets.

Rio Tinto’s share price is actually up fractionally from levels at the start of 2022. But I think it’s descent since the spring represents an attractive dip-buying opportunity.

It’s why I bought the company for my Stocks & Shares ISA in June. And at current prices of £50 per share, I’m thinking of buying more.

Rio Tinto trades on a forward P/E ratio of 6 times. It also boasts an 10.3% dividend yield for 2022.

Vistry Group

Levels of uncertainty around the housing market have spiked in the past fortnight. Share prices across the homebuilding sector have stabilised following an initial slump, but businesses like Vistry Group (LSE: VTY) are in danger of fresh plunges.

Mortgage rates are soaring in the aftermath of late September’s ‘mini budget.’ This is putting extra pressure on homebuyers’ budgets and threatening to derail property sales.

Rates on two-year and five-year fixed mortgages have soared to 12- and 14-year highs respectively above 6%. They’re predicted to keep rising too as the Bank of England acts against runaway inflation.

I own several housebuilding stocks. In fact, I bought Persimmon shares over the summer. And it’s clear to me that the risks facing these businesses has risen considerably of late.

But, at current prices, UK shares like Vistry look ultra-tempting. The FTSE 250 business trades on a P/E ratio of just 4.1 times and boasts a 12.5% dividend yield.

I might hold off buying Vistry shares right now until the near-term trading picture becomes clearer. Credit Suisse has advised that house prices could fall as much as 15%. But I believe the long-term outlook here remains solid, given Britain’s severe homes shortage and disjointed housebuilding policy.

With inflation sitting at the near-10% mark in the UK for August, this means my stagnant cash is losing value every day. And as such, I’m on the lookout for some cheap income stocks that can help me protect my money.

Here are two I’m strongly considering.

Rio Tinto

First on my list is Rio Tinto (LSE: RIO). The stock has fallen by over 5% across the last year, with it also down by just over 1% in 2022. However, in the last month the Rio Tinto share price has jumped 3%.  

At its current price, the stock offers an attractive dividend yield of 10.8%. While inflation is predicted to peak potentially above 20%, this yield is currently above the UK figure. This is a great way for me to mitigate the possibility of my cash eroding.

Despite cutting its interim dividend to $2.67 per share, the firm’s total payout for the first half still equated to its second highest ever!

On top of this, the stock looks cheap. It trades on a price-to-earnings ratio of 5.3, comfortably below the ‘value’ benchmark of 10. This is also below the average of its FTSE 100 peers.  

With a focus on iron ore, what could pose an issue for the business is the falling demand from China. The country accounts for half of the world’s steel output, so with ongoing Covid struggles alongside a weakening economy, this could spell trouble for Rio Tinto.

However, with a positive long-term outlook for commodities, I think Rio Tinto shares would be a solid buy for me today.

Taylor Wimpey

Another stock I have my eye on is homebuilder Taylor Wimpey (LSE: TW). Unlike Rio Tinto, it’s been a dire 12 months for the stock, as its share price has fallen around 36%. This year alone, it’s down nearly 40%.

With its demise, Taylor Wimpey’s shares offer a meaty 8.5% dividend yield. This isn’t above the UK inflation rate, of course. But the passive-income stream it will create will be valuable to my portfolio in the months ahead.

It’s been a turbulent few years for homebuilders. After making solid recoveries following the pandemic as the housing market boomed, 2022 has seen them suffer as a bleak economic outlook has seen market sentiment plummet.

Despite this, Taylor Wimpey’s half-year results were strong. The business managed to grow its operating profit on top of the impressive 2021 it had. It also saw its operating margin rise from 19.3% to 20.4%.

The biggest challenge the business is set to face in the months ahead is rising material costs as inflation continues to spike. Supply chain issues may also hinder its operations. However, with these as short-term concerns, I’d strongly consider buying Taylor Wimpey shares today.