I believe investing in shares in just one S&P/ASX 200 Index (ASX: XJO) company could boost my annual dividend income by 17%.
If my portfolio was offering passive income in line with the broader ASX 200 – as per the SPDR S&P/ASX 200 (ASX: STW) (an exchange-traded fund (ETF) tracking the index) – adding Rio Tinto Limited (ASX: RIO) shares could make a big impact. Here's how.
Can I up my dividend income with just one ASX 200 share?
That's right. The mammoth dividend yield currently on offer by the iron ore giant could bolster an average ASX 200 portfolio's passive income significantly.
According to the SPDR ASX 200 fund, the average ASX 200 share boasts a dividend yield of 4.72%.
Meanwhile, Rio Tinto shares closed Wednesday's session with a whopping 8.19% trailing dividend yield – that's certainly nothing to scoff at!
Let's assume, then, I was considering adding $3,000 worth of Rio Tinto shares to a $10,000 portfolio otherwise capable of offering the ASX 200's average yield.
Let's do the math
Here's how my ongoing yield might look if I added a chunk of Rio Tinto shares to an average-yielding ASX 200 portfolio:
| Investments' value | Expected dividend yield | Anticipated annual dividends |
| $10,000 | 4.72% | $472 |
| $3,000 | 8.19% | $245.70 |
| $13,000 | 5.52% | $717.70 |
As the above chart shows, by adding $3,000 worth of the ASX 200 giant's shares to the portfolio, its anticipated annual dividend offerings could jump $472 to $717.70 – a 52% increase.
It would also boost its expected dividend yield by 17% – lifting it from 4.72% to around 5.52%.
Of course, the more Rio Tinto shares added to the mix, the more the portfolio's total yield would increase towards that of the iron ore giant.
But I wouldn't buy into the ASX 200 favourite without considering a number of other factors.
More than meets the eye?
While increasing my annual dividend yield by 17% might be tempting, I likely wouldn't jump in with both feet just yet. Here's why.
Firstly, Rio Tinto's mammoth trailing dividend yield is just that – trailing. That means its future dividends might not reach such pinnacle levels.
Listed companies typically rely on their earnings to pay out dividends.
Thus, I would comb through the company's books just as I would before buying any other stock prior to deciding if it is a worthwhile addition to my portfolio. In doing so, its current 8.19% dividend yield wouldn't be a decisive factor.
Additionally, I would be sceptical about investing a large chunk of my portfolio in a single stock. I might even consider taking smaller positions in multiple high-yielding ASX 200 shares so to better diversify my investments.
