Wouldn't it be nice to be paid $50,000 per year for doing nothing? Well, if you like the sound of that, then read on.
I believe the Australian share market is a great place to earn a passive income. This is because a large number of companies share their profits with shareholders by paying them dividends each year.
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How can you earn $50,000 worth of dividends each year?
If you already have a large sum of money in your savings accounts, then you're halfway there.
Rural Funds Group (ASX: RFF) plans to pay an 11.28 cents per share distribution in FY 2021. Based on the current Rural Funds share price, this equates to a 5% distribution yield.
This means that if you were to invest $1 million into its shares, in 12 months you would have earned $50,000 in dividends if it delivers on its plans.
Though, it wouldn't be advisable to put all your eggs in one basket. I would suggest investors spread their funds across a number of similar yielding dividend shares or consider the Vanguard Australian Shares High Yield ETF (ASX: VHY).
This fund is invested in a total of 66 top shares which offer some of the most generous yields on the Australian share market.
What if you don't have a million dollars to invest?
Not everyone is lucky enough to have funds of that nature to invest. So how else can you do this?
If you have time on your side, then you can achieve this by investing in dividend-paying shares which have the potential to grow strongly over the long term.
Biotechnology company CSL Limited (ASX: CSL) is probably my favourite example of this.
There will be very few investors that regard CSL as a dividend share. After all, it is paying a full year dividend of $2.952 per share in FY 2020. This represents a yield of just over 1%, which is nothing in comparison to what else is on offer on the share market.
However, if you invested in the company when it first hit the ASX boards, you would have a very different opinion.
If you invested in the biotech giant at that point, you would have paid a stock-split-adjusted price of $0.76 per share. This means that you would be earning a yield on cost (the yield on the price you paid) of 388%.
This means that if you had invested $12,900 into its shares during its IPO, you would be generating an income of $50,000 in dividends in 2020.
But what about the future? While very few shares will have as much success as CSL, I believe there are some out there which have the potential to grow their earnings and dividends at a very strong rate over the next couple of decades.
Two that jump out at me are electronic design software company Altium Limited (ASX: ALU) and lottery ticket seller Jumbo Interactive Ltd (ASX: JIN). I believe both could be well worth consider as buy and hold investments.
