When it comes to ASX 200 dividend shares, is there any such thing as truly passive income?

How passive can dividend shares really be?

| More on:

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Key points

  • I own a portfolio of ASX dividend shares, such as Soul Pattinson and Brickworks
  • Dividend income can be very passive, with the dividend flowing into bank accounts with little to no effort. I mainly focus on my shares’ results every six months
  • The picks for my portfolio are ones that have a history of growing their dividends for shareholders

S&P/ASX 200 Index (ASX: XJO) dividend shares are an effective way to achieve investment income. There are a number of names that could pay a grossed-up dividend yield of more than 6%, or even 10%. But, there's a question worth asking about dividends – is it truly passive income?

First, let's consider what the term actually means and why we may want that sort of money.

What is passive income?

The Motley Fool's definition page describes it as this:

Passive income is a regular flow of money that requires little ongoing time and effort to earn. This is in contrast to the active income you earn from performing a service, like the wages you earn from carrying out your regular day job.

We can only work so much, so our total earnings are limited to a point. However, investing in ASX 200 dividend shares can allow our total income to increase further. We don't need to do any direct work for that ASX share's profit to be generated or the dividend to be paid.

I have taken on a dividend share investing strategy with my own portfolio, though I'm not just looking for maximum yields. I'm investing in businesses that I think can provide a mixture of long-term capital growth as well as good dividend income over time.

The idea is that once I have invested in an ASX dividend share, the dividends can roll in and I don't need to do more work to make that money roll in.

One day, I hope that my portfolio can pay me a significant amount in dividends every year, enough that it could pay for my living expenses. That's many years down the road though.

Is it passive income for me?

It's somewhat hard to say if it's completely passive for me because there are three different angles I could take.

My job involves reading and writing about ASX shares all the time, so I do spend way more time than "nothing" actually looking at the share market in general. But I only own a few of the thousands of potential investments on the ASX, so only a small part of my work is actually writing about the shares I own.

Second, I enjoy reading about shares. Even if I stopped working in the field, I'd still want to read about what's going on in the business world. I guess you'd call my interest a hobby if I were working in a different industry.

But, in terms of how much time I actually put into checking my portfolio and so on, I generally don't look at how the share prices perform day to day in terms of reviewing performance. I don't think checking my portfolio more regularly will make my shares perform better, or help my mindset. But, I do scan through prices when I'm buying my next parcel of shares, to choose what I think is the best value (or best dividend opportunity).

However, there are at least a couple of announcements each year that I do like to look at – the half-year result and the full-year result. I think it's good to be knowledgeable about the latest dividend announcement, how things are going, and so on. Keeping this in mind helps me decide which ASX shares I want to buy next and informs me how large the next dividend payment is going to be.

Why I've chosen reliable ASX dividend shares

I have built my portfolio to be focused on names that can hopefully provide consistent (and, hopefully, growing) dividend income.

Some of the ASX 200 dividend shares in my portfolio include Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) and Brickworks Limited (ASX: BKW), both of which have ongoing streaks of dividend growth.

Other businesses in my portfolio are also building a reputation for dividend growth, including Rural Funds Group (ASX: RFF) and Duxton Water Ltd (ASX: D2O). Plus, I do own some listed investment companies (LICs).

For many of the names in my portfolio, I think I could leave them alone for three or five years and not need to worry about them while receiving attractive dividend income.

I've chosen names I think can provide me with largely stress-free dividend income. I think these names can hopefully provide more resilient dividends than the wider market due to their business models, strategies, and assets.

I have also chosen the names in my portfolio where I believe I'd be more enthusiastic to buy shares at a cheaper price, rather than worried about a drop in the price. Short-term market movements aren't going to influence my thinking.

Motley Fool contributor Tristan Harrison has positions in Brickworks, DUXTON FPO, RURALFUNDS STAPLED, and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Brickworks and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia has positions in and has recommended Brickworks, RURALFUNDS STAPLED, and Washington H. Soul Pattinson and Company Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Dividend Investing

Happy man holding Australian dollar notes, representing dividends.
Dividend Investing

Buy these ASX dividend shares for passive income

Analysts think these shares could be a good source of passive income.

Read more »

Woman calculating dividends on calculator and working on a laptop.
Dividend Investing

Analysts say these ASX dividend stocks are top buys

Looking for income? Analysts are saying good things about these shares.

Read more »

Hand of a woman carrying a bag of money, representing the concept of saving money or earning dividends.
Dividend Investing

Here's one way to invest $20k to target an average 7% ASX dividend yield

Some businesses can provide high levels of dividend yield.

Read more »

Happy couple enjoying ice cream in retirement.
How to invest

I'd buy Woodside shares today to generate $1,000 of monthly passive income

At the current share price, I think Woodside can continue to deliver market-beating, long-term passive income.

Read more »

Man holding different Australian dollar notes.
Dividend Investing

Buy Telstra and these ASX dividend stocks this week

Analysts think these stocks could be in the buy zone for income investors right now.

Read more »

Man holding a calculator with Australian dollar notes, symbolising dividends.
Dividend Investing

Buy these ASX dividend shares with 5% to 7% yields

Analysts are tipping these buy-rated stocks to provide big dividend yields.

Read more »

A woman has a thoughtful look on her face as she studies a fan of Australian 20 dollar bills she is holding on one hand while he rest her other hand on her chin in thought.
Dividend Investing

Is the 9.2% dividend yield on Fortescue shares too tempting to pass up?

Is a 9.2% dividend yield too good to be true? Here's what I think.

Read more »

Australian dollar notes in businessman pocket suit, symbolising ex dividend day.

Own the Vanguard Australian Shares Index ETF (VAS)? Here's how much you'll get paid today

Today's VAS paycheque might disappoint some investors.

Read more »