I have worked for many years to replace 100% of my salary with passive income streams. For me personally, this has taken a mix of private business ownership, peer-to-peer lending, buying great dividend shares and taxation arrangements.
Unlike many of my generational cohort, I do not own investment real estate. I have always found real estate to be too much hard work for too little return.
Of all of these strategies, it is the dividend shares that have been most beneficial. So, here are some great ASX dividend shares for income replacement and a few tips on how to find them.
Out of favour shares
The secret to a good salary replacement strategy is to buy at the right price. The lower the share price at purchase, the greater the dividend yield. For many shares, this means waiting for a market dip. Many ASX coal shares, however, are selling at a discount because they are out of favour.
Yancoal Australia Ltd (ASX: YAL), for example, is presently selling at a third less than its net asset value. It is well managed, has many strongly performing assets, and has a trailing dividend yield of 14.4%. Given Yancoal has 100% dividend stability, an investment of $10,000 today would likely deliver a dividend yield of $1,440. An almost unheard of return in a time of near-zero interest rates.
Another company in the coal industry is New Hope Corporation Limited (ASX: NHC). New Hope pays a 10.4% dividend yield at today's share price. It is also trading at about a third less than its net asset value. This means that in theory, you could buy the entire company and sell its parts off for a ~30% profit.
Because both of these ASX resources shares are well managed and selling at a discount, there is also the chance of capital growth as well as high dividend payments.
Great ASX shares for salary replacement
Westpac Banking Corp (ASX: WBC) is a bank under siege at the moment. The AUSTRAC scandals, the impacts of the bushfires and coronavirus have all conspired to drive the Westpac share price down by ~33% year-to-date. It isn't out of favour, it is actually performing badly. Yet the underlying company is still strong despite a slew of bad loans and new management is settling in. Westpac pays an annual dividend of 10.87% at the time of writing (although it recently deferred its FY20 interim dividend decision). It is selling at a price-to-earnings (P/E) ratio of under 10 which is very rare in this sector.
The ASX banking sector has always been a good hunting ground for dividend investors, and I believe today is no different. Bendigo and Adelaide Bank Ltd (ASX: BEN) is a great little bank which is managed conservatively. It pays a trailing dividend yield of 11.06% on today's share price. Bank of Queensland Limited (ASX: BOQ) is also selling for a P/E ratio of under 10 and pays a whopping trailing dividend yield of 13.6%.
Foolish takeaway
I believe replacing 100% of your salary through dividend shares is an achievable goal for most retail investors. Selecting high-yielding dividend shares with solid dividend consistency and strong business fundamentals will provide you with both high yields as well as a strong chance of capital appreciation in the longer-term.
