How to replace your entire wage with ASX dividend shares

In this article I’m going to try to show you how to replace your entire wage with ASX dividend shares.

I can totally understand why people want to grow their dividend income because of what’s going on right now. COVID-19 has caused a lot of uncertainty. The great thing about ASX shares is that they are among the best businesses in their industry, perhaps the best in the country. You can usually rely on them for a decent flow of dividends. 

Whilst March 2020 and April 2020 certainly looked rough with the rapid spread of the coronavirus and the restrictions which caused many parts of the country and economy to come to a standstill.

But the following six months has shown why it’s important to be invested in shares. The recovery by the share market has just been extraordinary.

How to get started replacing your wage with ASX dividend shares

Over the long-term I think that shares, such as ASX shares, have proven that they can generate great returns for investors.

Most businesses make a profit each year and many of them pay out a portion of that profit out as a dividend (or distribution). Businesses can retain some of the profit to re-invest back into the business for more growth.

To get started you just have to start putting money to work into the share market. Pick a broker – there are plenty to choose from like banks or low-cost providers – then add some money and start investing.

There are lots of good choices where you can start your investment journey. You don’t have to necessarily start with ASX dividend shares. Picks like Future Generation Investment Company Ltd (ASX: FGX), Future Generation Global Invstmnt Co Ltd (ASX: FGG), Betashares Global Quality Leaders ETF (ASX: QLTY), iShares S&P 500 ETF (ASX: IVV) and Vanguard Msci Index International Shares Etf (ASX: VGS) could be good places to start.

There are lots of calculators to help you work out how much money you may need to add to your portfolio to grow your portfolio to the size you need replace your dividend income. I think Moneysmart’s is one of the best calculators out there.

How big does your portfolio need to be?

The necessary size of your portfolio will depend on how much income you’re trying to replace and the dividend yield of your portfolio.

For example, if you’re trying to replace $40,000 of wage income then a 4% dividend yield would require a $1 million portfolio.

If you had a portfolio with higher yielding ASX dividend shares, say a 6% yield, but you wanted to replace $100,000 of income then you’d need a $1.67 million portfolio.

I’m not going to name every single possible combination, but you get the idea.

For me, I’d be aiming for around a $1 million portfolio with a 5% yield to generate $50,000 of gross income before tax. If I were going to retire, I’d expect not to have to pay certain expenses – like transportation (to work), or mortgage costs because I’d aim to have paid off the mortgage by the time I retire. That would mean I could live off a lower annual income, meaning I’d be okay with a ‘smaller’ portfolio.

Which ASX dividend shares are worth buying?

It’s getting quite hard to find nicely-priced, good quality ASX dividend shares because of how strong the share market has run and how low interest rates are, which has pushed up share prices.

But here are some examples, many of which are in my portfolio:

Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) has a grossed-up dividend yield of 3.3%.

Brickworks Limited (ASX: BKW) has a grossed-up dividend yield of 4.2%.

Rural Funds Group (ASX: RFF) has a FY21 distribution yield of 4.9%.

WAM Microcap Limited (ASX: WMI) has a grossed-up dividend yield of 5.2%.

Future Generation Investment Company (FGX) has a grossed-up dividend yield of 6.3%.

Australian United Investment Company Ltd (ASX: AUI) has a grossed-up dividend yield of 6.3%.