With inflation soaring at the moment, the value of my cash in the bank is dwindling. With this in mind, I am on the lookout for the best dividend stocks to make me a passive income. One stock I’d look to add to my holdings to beat inflation is Rio Tinto (LSE:RIO).
As a quick reminder, a dividend is the distribution of some of a business’s earnings to its shareholders as a reward for investing their capital. This capital may have helped fund growth and performance. The way to determine a firm’s dividend yield is to look at the latest dividend payment and the current share price. If a firm pays a dividend of 10p per share, and the share price is 100p per share, the yield equates to 10%.
Mining giant
Rio Tinto is one of the world’s largest mining firms with over 60 mining operations spanning 35 countries. It is supported by close to 50,000 employees. It mines and sells a range of minerals such aluminium, copper, iron ore, lithium, and diamonds to over 2,000 firms throughout the world.
As I write, Rio shares are trading for 5,372p. At this time last year, the shares were trading 4% higher, at 5,637p.
Risks involved
One of the biggest risks of investing in commodities firms like Rio Tinto is the volatility that comes with it. Commodities prices and demand is closely linked to the economy and geopolitical issues. When there is economic uncertainty, like there is currently, prices can jump up and down. A lower price is usually bad news for firms like Rio as it could squeeze margins and performance, in turn affecting any dividend and passive income I hope to make as an investor. Rio has cut dividends in the past too.
Finally, when investing in dividend stocks, inflation is still a threat. If the dividend is cancelled or drops below inflation, then I may not see a return on my investment.
Passive income champion
I believe Rio Tinto is one of the best dividend stocks I could buy to beat inflation. Firstly, it sports a very attractive dividend yield of 9%! It is worth noting that the FTSE 100 average is 3%. Furthermore, at current levels, the shares look cheap with a price-to-earnings ratio of just six.
In order for any passive income to continue, performance has to be consistent. Rio has a good track record of performance. I do understand that past performance is not a guarantee of the future, but I use it as a guide when assessing investment viability. Looking back, I can see revenue and gross profit has grown year on year for the past four years.
Finally, Rio has a cash rich balance with no debt on the books. I am buoyed by this as it means more money from performance in the future could be paid as dividends, rather than paying down debt. This is one of the key fundamentals I look at when looking at income investments for my holdings.
Overall, Rio’s juicy dividend yield, powerhouse position in its respective market as well as performance record and lack of debt, fill me with confidence I can make a passive income from Rio shares. I would add the shares to my holdings at current levels.
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Jabran Khan 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.
