Looking to bank an extra $2,000 a year in passive income by investing in an S&P/ASX 200 Index (ASX: XJO) dividend stock?
Then you might want to run your slide rule over ASX 200 iron ore miner Rio Tinto Ltd (ASX: RIO).
Here's why I like the ASX 200 miner for passive income.
Tapping Rio Tinto shares for passive income
Before looking at the specifics of Rio Tinto shares, a few important points.
First, remember that a proper passive income portfolio should contain a number of ASX dividend shares, certainly not just one! Ideally, these stocks will operate across various sectors and even various countries. That kind of diversity will reduce the risk of my income getting squeezed if a particular stock or sector hits a rough patch.
Second, the yields we typically see quoted are trailing yields. Future yields may be higher or lower depending on a range of company-specific and macroeconomic factors.
With that said, Rio Tinto shares not only pay fully franked dividends, meaning I should be able to retain more of that passive income at tax time, but the ASX 200 miner has also seen its share price gain 12% in 2023. And shares are up 25% since 16 August.
That's an important trend when investing for passive income. After all, I don't want to invest in a stock where the share price falls and wipes out the gains I've banked from some or all of the dividends paid out during the year.
And the outlook for Rio Tinto shares in 2024 is strong, with iron ore prices broadly forecast to remain resilient. That should help support the share price and future dividends.
Some leading experts are also bullish on Rio Tinto. Morgan Stanley has an overweight rating on the ASX 200 miner and a $134.50 price target. And Goldman Sachs has a buy rating with a $137.70 price target.
Both forecasts would see the Rio Tinto share price up considerably from the current $129.69 per share.
On the passive income front, Rio Tinto shares delivered a fully franked final dividend of $3.265 per share on 20 April. The interim dividend of $2.609 per share landed in eligible investors' bank accounts on 21 September.
All told, that sees this ASX 200 dividend stock paying out $5.874 per share in dividends over the past 12 months.
At the current share price that equates to a fully franked trailing yield of 4.5%.
And if I'm aiming for $2,000 a year in passive income, that means I'd need to buy 341 Rio Tinto shares today.
