I think it’s fair to say that the collapse of Lehman Brothers bank in September 2008 became the symbol of the global financial crisis. It marked the largest bankruptcy in US history. Rio Tinto (LSE: RIO) shares crumbled along with the rest of global stock markets.
But what if I’d invested £5,000 in Rio Tinto stock during those dark days of 2008? How successful (or not) would my investment be today?
An iron ore giant
Rio Tinto was founded in 1873 on the banks of the Rio Tinto river in Andalusia, Spain. Today, it has a market cap of £92bn and is the world’s second-most valuable mining company.
It’s one of the world’s largest producers of iron ore, a raw material that makes up the bulk of the firm’s sales. In 2021, it produced a staggering 276m metric tons of the stuff.
Iron ore is the raw material used to make steel. And steel is found in everything from skyscrapers and cars to washing machines.
Share price performance
The Rio Tinto share price is up 44% since the middle of September 2008. That means that after 14 years, my £5,000 would now be worth £7,220. That works out at a compound annual growth rate (CAGR) of 2.6%. That doesn’t sound particularly impressive, I have to say.
Of course though, that’s only part of the picture. Rio Tinto also pays dividends, and it’s increased them substantially over the years. So I’d need to factor in these as well to assess the total return.
The dividend calculator on Rio Tinto’s website tells me that I’d have received £3,821 in dividends over that period. Which brings the total return to a more respectable £11,041. If I’d chosen to reinvest the dividends rather than pocketing the income, I’d have £13,276.
Should I buy the stock?
The price of iron ore is highly sensitive to economic cycles. So the looming possibility of a global recession is not great news for construction projects and therefore global steel demand.
That said, the recent lifting of Covid restrictions in China could certainly help, as there are over 3,000 Chinese steel mills. But then again, there’s an ongoing property crisis in China that could threaten the whole steel industry there.
Which is all to say, I have absolutely no idea how any of this is all going to play out. And that’s the problem for me. I’d need a basket of global mining stocks to spread the risk.
So let’s assume I buy Rio Tinto shares, then diversify by adding another couple of large mining stocks that pay high dividends. Then I might also want one or two red-hot lithium stocks, such as Albemarle and Sociedad Quimica y Minera de Chile.
Before I know it, I could end up with as many as six or seven individual mining stocks. That would be nearly 20% of my entire portfolio! Considering how volatile the mining sector can be, I’m not willing to risk that. That’s why I won’t be buying shares.
