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How to create a yearly income of $65,000 in dividends

Dividend shares

It is totally possible for people to generate $65,000 in annual dividends at some point in their life thanks to ASX dividend shares.

Why $65,000?

I think producing an average wage in the form of dividends from ASX shares would be great.

According to statistics produced by the Australian Bureau of Statistics (ABS), the May 2020 numbers indicated that the average annual income for an Aussie is almost $68,000. COVID-19 may have influenced that number, so I thought $65,000 would be a slightly more realistic target to write about.

When we get older, hopefully we’ll be able to eliminate some expenses like a house payment and education debt, meaning we wouldn’t need as much income to live.

How much do you need to get $65,000 in dividends each year?

The dividend yield of your portfolio will largely decide how big your portfolio needs to be for the income goal. If you had a 1% dividend yield then your portfolio would have to be $6.5 million.

A 1% yield is very low, even if you aim for a growth portfolio. If your portfolio had a 3% yield then you’d need a portfolio worth $2.17 million.

If you aimed for a $1 million portfolio then you would need a dividend yield of 6.5%. Some ASX dividend shares may be able to provide that, but it’s hard to find good shares with good yields. COVID-19 has made it particularly difficult with plenty of dividend cuts from various ASX blue chips.

How do you get there?

Well a portfolio of between $1 million to $2 million would take quite a while to build. It would take a lot of saving, investing and compound growth. Franking credits help too. 

Moneysmart has a great compound interest calculator that helps you play around with numbers to see how much you’d need to invest and how long it would take.

As an example, if you invested $1,000 a month into ASX shares and your portfolio compounded at 10% a year then you’d have $1.327 million after 25 years. You’d get to $1 million in under 23 years.

If you’re a double income household then it’s probably easier to invest $1,000 a month (or more), but I think investing $1,000 a month is possible for a lot of people with a frugal mindset and decent earnings. The less you earn the more frugal you’d have to be to make it work. It’s particularly difficult during this COVID-19 era.

What are good ASX dividend shares?

There are a number of ASX dividend shares that I really like. However, the record low interest rates have pushed up asset prices and caused dividend yields to fall.

Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) has a grossed-up dividend yield of 3.5%.

Brickworks Limited (ASX: BKW) has a grossed-up dividend yield of 4.3%.

Future Generation Investment Company Ltd (ASX: FGX) has a grossed-up dividend yield of 6.6%.

WAM Microcap Limited (ASX: WMI) has a grossed-up dividend yield of 5.5%.

APA Group (ASX: APA) has a distribution yield of 4.6%.

Rural Funds Group (ASX: RFF) has a FY21 distribution yield of 4.75%.

Vitalharvest Freehold Trust (ASX: VTH) has a distribution yield of 6%.

WAM Leaders Ltd (ASX: WLE) has a grossed-up dividend yield of 7.9%.

As you can see, many of the above names have a yield lower than 6.5%. Higher yields can be riskier, they may be more likely to cut their income payments in times of difficulty.

I think that Soul Patts, Brickworks, Future Generation and WAM Microcap are among the highest-quality ASX dividend shares. I like them for their reliability, the regular dividend growth and the diversification.

It may take a bit longer to reach $65,000 of annual income with lower yielding shares, but I’d feel more secure and they may have more capital growth potential. Total returns are important.

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Motley Fool contributor Tristan Harrison owns shares of FUTURE GEN FPO, 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 APA Group. 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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