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I’d buy 224 shares of this stock for £100 in monthly passive income

Passive income text with pin graph chart on business table
Passive income text with pin graph chart on business table

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.

  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.

The post I’d buy 224 shares of this stock for £100 in monthly passive income appeared first on The Motley Fool UK.

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Mark Tovey has no position in any of the shares mentioned. 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.

Motley Fool UK 2022