Motley Fool Australia

How to create a yearly income of $50,000 in dividends

ASX dividend shares

I can understand why investors are wanting to create a yearly income of $50,000 in dividends.

The coronavirus has shown how fast incomes can disappear for workers, but plenty of businesses have the financial flexibility to be able to keep paying dividends even during this rough time.

In normal times, shares have a great ability to pay out cash dividends and continue to grow profit at the same time. If you can earn $50,000 a year in dividends then you’d be able to live a very comfortable life.

A typical business like Wesfarmers Ltd (ASX: WES) has a grossed-up dividend yield of 5.7%. If you had $1,000 invested in Wesfarmers you’d get $57 of gross dividends (including franking credits) after one year. That’s a lot better than interest from the bank.

But we’d need to do a lot more before hitting the annual target of $50,000 of annual income:

Earn, save and invest

In normal times, to invest we need to save and to save we need to earn money.

Our own personal finances work just like a business. You need to earn more than you spend to make a ‘profit’ for your finances which you can then invest with. If you can consistently save enough money then you can consistently invest. Whether that’s $500 a month or $5,000 a month, your investing money for dividends needs to come from living below your means.

This is what delayed gratification is all about. Once you’ve covered paying for the basics, you can either spend it on extras or use it to build your wealth for much larger enjoyment. Just make sure you’re enjoying your current life. 

Invest and build your portfolio for dividends

Once you’ve gotten into a rhythm of saving you then need to start investing. And leave the money to compound for the long-term no matter whether the share market goes up or down. Indeed, recessions are the best times to buy shares because it’s when shares are the cheapest.

This website is all about helping you find and decide on which shares you want to invest in. Shares have historically delivered an average return of about 10% per year.

Exchange-traded funds (ETFs) can help you invest in the whole share market without thinking about it. You can achieve great results and hardly know anything about investing. I think two of the best ‘simple’ ETFs are iShares S&P 500 ETF (ASX: IVV) and Vanguard MSCI Index International Shares ETF (ASX: VGS).

You can also decide to do your own share picking and try to outperform the market. Three long-term growth shares I’m looking at right now are Brickworks Limited (ASX: BKW), Pushpay Holdings Ltd (ASX: PPH) and Bubs Australia Ltd (ASX: BUB).

Another choice could be to go with investment managers who can do the investing for you. Some of the best options on the ASX in my opinion are: Magellan Global Trust (ASX: MGG)WAM Microcap Limited (ASX: WMI) and MFF Capital Investments Ltd (ASX: MFF).

Over the long-term shares have returned an average of 10% a year. If you invest $1,000 a month and your shares return an average of 10% a year, you’ll have $1.97 million after 30 years.

Receive dividends

The last stage of the plan is just to sit back and receive dividends.

How much would a portfolio worth $2 million give you in annual dividends? Well, it depends what you invest in.

According to Blackrock, the S&P 500 is currently offering a trailing yield of around 2%. This would translate to an annual dividend income of $40,000. You could boost that yield by allocating some of your portfolio to higher yielding shares like Rural Funds Group (ASX: RFF), Future Generation Investment Company Ltd (ASX: FGX) and WAM Research Limited (ASX: WAX) that have much better dividend yields than 4%.  

Where to invest $1,000 right now

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for more than eight years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes are the five best ASX stocks for investors to buy right now. These stocks are trading at dirt-cheap prices and Scott thinks they are great buys right now.

*Returns as of February 15th 2021

Motley Fool contributor Tristan Harrison owns shares of FUTURE GEN FPO, Magellan Flagship Fund Ltd, MAGLOBTRST UNITS, RURALFUNDS STAPLED, and WAM MICRO FPO. The Motley Fool Australia owns shares of and has recommended PUSHPAY FPO NZX and RURALFUNDS STAPLED. The Motley Fool Australia owns shares of Wesfarmers Limited. The Motley Fool Australia has recommended Brickworks, BUBS AUST FPO, and Vanguard MSCI Index International Shares ETF. 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.

Related Articles…

Latest posts by Tristan Harrison (see all)