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How to generate $1,000 a month in dividends from shares

Want to generate $1,000 a month in passive income? I think that dividends from shares are answer.

It’s particularly ASX shares that have good income advantages due to the franking credits which refunds tax paid by Australian companies to Aussie taxpayers as a tax credit, which then increases the dividend yield on offer.

How much do you need to make $1,000 a month in dividends from shares?

The money we earn from work is the most important source of earnings until we retire. It is a lot easier to earn money from work than it is to build up enough money to make thousands of dollars a year in dividends.

However, diligent saving and the power of compound interest can grow into a large nest egg. If you want to receive $1,000 a month then that obviously means $12,000 a year.

The necessary size of your nest egg will depend on what you invest in and the yields of those dividend shares. For example, if your portfolio had a 10% dividend yield then you’d ‘only’ need a portfolio worth $120,000. But, dividend shares with high yields are riskier and/or probably won’t increase their dividend much over time.

Let’s go for a bit of a lower yield.

If your portfolio had a 6% dividend yield you’d need a $200,000 portfolio. A 6% yield is still pretty high, particularly with how low Australian interest rates are. Today’s extremely-low interest rates mean there aren’t that many good dividend shares left with yields above 6%.

If your portfolio had a 4% dividend yield you’d need a portfolio worth $300,000.

Don’t forget, the above numbers exclude the effects of tax – every reader will have a different tax situation, but unless you need income it might be unwise to choose very high dividend yields because you may be giving some of your returns to the tax man for no real benefit.

How to grow a portfolio worth $120,000 to $300,000

Historically, the share market has produced returns of 10% per year over the long-term. So using 10% would be a decent number to calculate any return numbers, although returns could be a little lower in the future from today’s current market prices.

If you invest $1,000 a month it would take just over seven years to reach a portfolio of $120,000 growing at 10% per year. To reach $300,000 it would take less than 14 years. Notice how the power of compound interest causes $180,000 to be added in the second period of seven years, but $120,000 is added in the first seven years.

Market-tracking investments like index exchange-traded funds (ETFs) will help you achieve what the market does. Some of the ideas in this space are iShares S&P 500 ETF (ASX: IVV)Vanguard MSCI Index International Shares ETF (ASX: VGS) and BetaShares Australia 200 ETF (ASX: A200).

But, if you choose to invest in the best growth shares you could reach your desired portfolio balance even quicker. I think some of the best ideas right now are Altium Limited (ASX: ALU), MFF Capital Investments Ltd (ASX: MFF), Pushpay Holdings Ltd (ASX: PPH) and Webjet Limited (ASX: WEB).

Which shares would be good for dividend yields?

Depending on the yield you’re looking for, here are some various ideas which have sustained or growing dividends:

Naos Emerging Opportunities Company Ltd (ASX: NCC) has a grossed-up dividend of 9.8%.

WAM Research Limited (ASX: WAX) has a grossed-up dividend of 9.9%.

WAM Leaders Ltd (ASX: WLE) has a grossed-up dividend yield of 8%.

Future Generation Investment Company Ltd (ASX: FGX) has a grossed-up dividend yield of 6.7%.

Rural Funds Group (ASX: RFF) has a distribution yield of 5.4%.

Brickworks Limited (ASX: BKW) has a grossed-up dividend yield of 4.9%.

Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) has a grossed-up dividend yield of 4.25%.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended PUSHPAY FPO NZX, RURALFUNDS STAPLED, and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia owns shares of Altium. The Motley Fool Australia has recommended Brickworks, Vanguard MSCI Index International Shares ETF, and Webjet Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.