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How to generate $50k a year from ASX dividends

Stress-free investing

Generating $50,000 a year will be enough to supplement a modest income or to provide a reasonable income for a debt free life. Either way, it is a significant passive income. To achieve this at an average dividend yield of, say, 6%, then you require a portfolio of approximately $850,000. For me personally, I use a combination of growth shares and high yield ASX dividend shares to achieve this.

If you are lucky enough and wise enough to begin early, then you can achieve this via regular contributions at a reasonable return. For example, an investor could achieve this by contributing $10,000 a year, for 27 years at a return of 8%.

This sounds hard to begin with, and it is. Nonetheless, through careful spending, savings, and the magic of compound interest this can happen even quicker. In addition, if you were to reinvest the 6% dividend payment every year then this could shave nearly a decade off the time.

Here are some options for high yield dividend shares to kick start a portfolio that will achieve this even faster. However, at all times you have to protect your capital. At the very least your investment cannot continually shed capital value.

Fortescue Metals Group Limited (ASX: FMG)

Among general ASX dividend shares I believe Fortescue is one of the best. Right now many advisors are concerned over the high iron ore price and the high demand. However, even at a much lower ore price, Fortescue will remain a very profitable company able to operate at scale. Fortescue pays a current trailing 12-month (TTM) dividend yield of 10.82% and a price to earnings ratio (P/E) of 7.46.

The company has grown its share price at a compound annual growth rate (CAGR) of 14.6%. This is a higher share price growth and dividend yield to bring forward the end date.

Centuria Office REIT (ASX: COF)

This office REIT is one of the best placed ASX dividend shares to continue paying a high yield. Over the 5 years this real estate investment trust (REIT) has been listed, its share price CAGR has been under 1%. However, it is currently 30% lower in year to date trading and I expect it to rise back over time. However, aside from the share price growth, Centuria Office REIT pays a TTM dividend yield of 8.57%. This is a great yield comparatively speaking. 

Magellan Financial Group Ltd (ASX: MFG)

Magellan is one of the nation’s great investment managers. In fact, this ASX dividends share price has had an amazing CAGR of 52.7% over the past 10 years. If it continues to grow at this rate, an investment would double in two years. However, even if it falters, it is still likely to continue growing in the double digits as this is a very competent investment company. On the downside, the current TTM dividend yield is only 3.75%. 

The goal here is to build a resilient and robust portfolio. We sacrificed share price growth with Centuria Office REIT for the dividend; we sacrifice the dividend with Magellan for share price growth.

A small Cap ASX dividend share

This is the higher risk end of the market. However, I include this because if you choose a company with a large addressable market, and a proven business model, it reduces the risk and increases the potential return. 

G8 Education Ltd (ASX: GEM) is a small cap childcare and early learning company with assets in Australia and Singapore. Over the past 10 years, the company has had a share price CAGR of 16.7%, enough to triple the initial investment in this time. Furthermore, it presently has a TTM dividend yield of 10.16%.

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Motley Fool contributor Daryl Mather owns shares of Centuria Office REIT and Fortescue Metals Group Limited. The Motley Fool Australia has no position in any of the stocks mentioned. 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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Daryl Mather