How does the idea of £300 per month in passive income from just one stock sound? It sounds pretty good to me. Today I’m looking at how it might be possible with Rio Tinto (LSE: RIO) shares.
The Rio share price has had an erratic year. It fell in the second half after the mining giant shaved its first-half dividend. That was largely on the back of falling demand from China. But the shares are still up 15% over the past 12 months.
Dividend yield
We’re looking at a forecast dividend yield of around 8.2% now, after the interim cut. I’d probably rate Rio Tinto, however, as one of the FTSE 100 stocks least likely to maintain its dividend unchanged over the next 10 years. In fact, it’s already been cut twice now in the past decade.
I’ll come to that shortly. But what kind of investment would I need at the current yield to secure £300 per month in passive income? Well, the headline is a bit of a giveaway. At today’s Rio Tinto share price, I’d need 1,000 shares. And to buy them now, I’d have to find £54,000 in cash.
Building the cash
I don’t have that to spare, so how could I accumulate it? Well, suppose I could invest £300 per month starting today. It looks like we’re heading for a couple of years of tough economic conditions. But I’m sure a lot of folk have more than that amount of spare cash they could invest every month.
With that amount put away monthly to invest in Rio Tinto shares, it should take about 10 years to build up the desired pot. I should then be able to enjoy my £300 per month in passive income for the rest of my life.
Dividend cuts?
Let’s get back to the Rio Tinto dividend, and how stable it’s likely to be over the next decade. The mining sector is one of the Footsie’s most cyclical. And demand for metals and minerals can vary considerably from year to year.
And over the next few years, I expect the recessionary outlook to impact profits and dividends. Then again, during strong phases, the Rio dividend could rise above 10% again, where it was in 2021.
So this is just one illustration, using a specific dividend yield chosen today, to show how it can be possible to build up a passive income pot in a reasonable time frame.
Diversification
In reality, I go for diversification and I spread my investments across a number of high-yielding dividend stocks. That spreads the year-by-year risk, and helps even things out over the long term.
I currently have a number of income stocks in my portfolio. And I intend to invest as much as I can in them over the next decade or more. I don’t currently own any Rio shares. That’s simply because there are too many good dividend stocks out there than I can afford to buy.
But Rio Tinto is definitely on my list of likely future passive income buys.
