Motley Fool Australia

How to generate $1,000 a month in dividends

ASX dividend shares

Do you want to generate $1,000 a month in dividends? I believe it’s totally possible for your portfolio. You just have to remained disciplined and choose the right ASX shares.

Dividends are great

I think that dividends from ASX shares are great. It’s wonderful that we can get paid by our investments for no effort, except the initial investment.

Businesses can pay out dividends (or distributions) from their annual profits and retain some of the profit to re-invest for more growth.

I think it’s a good idea for most Australian companies to pay out a dividend. It’s nice for shareholders to receive cash payments just being part owners of the business. Some high growth businesses may need all of the available capital to fund growth, but larger businesses don’t need to retain all of their cashflow. 

Franking credits

Australian companies get particular advantages for making taxable profit in Australia. The country does have a relatively high company tax rate, however all corporate income tax paid can be used as a refundable tax credit (called franking credits) for Australian tax residents. Franking credits reduce the taxes owed by taxpayers who receive dividends. For some low income earners and retirees it can mean the entire franking credit amount being refunded to investors when they do their tax return.

Franking credits can turn a $70 dividend into a $100 grossed-up dividend after the tax return is completed.

Which ASX dividend shares are good ideas?

Different investors will have different opinions about which ASX shares are good ideas for income.

Some people are just attracted to large ASX blue chips which are seemingly safe dividend ideas like Wesfarmers Ltd (ASX: WES), Coles Group Limited (ASX: COL) and BHP Group Ltd (ASX: BHP).

However, as this COVID-19 period has shown, I don’t think some businesses can be relied on as dividend ideas because they’re not that defensive.

Below are some of my favourite ideas. Before I get into it, I just want to tell you that a listed investment company (LIC) is a company which invests in other businesses on behalf of shareholders. Here are my ideas for an ASX dividend share portfolio:

Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) has a grossed-up dividend yield of around 4%. It’s a diversified investment conglomerate.

Brickworks Limited (ASX: BKW) has a grossed-up dividend yield of 4.4%. It is a diversified property business.

Future Generation Investment Company Ltd (ASX: FGX) has a grossed-up dividend yield of 6.6%. It’s a philanthropic, diversified LIC.

WAM Microcap Limited (ASX: WMI) has a grossed-up dividend yield of 5.6%. It’s a LIC which invests in small caps.

Rural Funds Group (ASX: RFF) has a FY21 distribution yield of 4.7%. It’s a farmland real estate investment trust (REIT).

Magellan Global Trust (ASX: MGG) aims for a 4% distribution yield. It’s a globally-focused listed investment trust (LIT).

WAM Leaders Ltd (ASX: WLE) has a grossed-up dividend yield of 8%. It’s a LIC which focuses on large cap ASX shares.

If you bought an equal amount of each of the above ASX dividend shares your portfolio would be very diversified and it would have a grossed-up dividend yield of 5.3%.

What size portfolio would you need with a 5.3% yield to make $1,000 a month in dividends?

The dividend yield of your portfolio dictates how much income you’d make from it. If you had a $100,000 portfolio with a 10% dividend yield then you’d receive $10,000 of dividends a year.

If you had a $200,000 portfolio with a 5% yield it would pay $10,000 a year.

You’d need a portfolio worth $226,415 with a 5.3% grossed-up yield to get $1,000 a month, or $12,000 a year.

Of course, not many people have almost a quarter of a million dollars sitting around in cash to invest into shares. It takes saving, investing and compounding to reach that type of wealth. According to the Moneysmart calculator, it would take less than 11 years by investing $1,000 a month into ASX shares to reach a portfolio size of $230,000 if it compounded at 10% a year.

Of course, your portfolio could reach $230,000 faster if you invested more per month or identified investments better than the overall market (which is still a good wealth builder).

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 June 30th

Motley Fool contributor Tristan Harrison owns shares of FUTURE GEN FPO, MAGLOBTRST UNITS, RURALFUNDS STAPLED, WAM MICRO FPO, and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia owns shares of and has recommended Brickworks, RURALFUNDS STAPLED, and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia owns shares of COLESGROUP DEF SET and Wesfarmers Limited. 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.

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