How does $1,400 of passive income each year sound? Think of the weekend getaways, wining and dining, and extra time with family that could provide. It would even protect hard-earned cash from Australia's current 6.9% inflation rate.
And all it would take is $20,000 invested in S&P/ASX 200 Index (ASX: XJO) shares with a 7% dividend yield.
Though, achieving such a yield might be easier said than done.
Here's how I would invest $20,000 in ASX 200 shares if I were aiming to receive a 7% dividend yield.
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How I'd find ASX 200 shares to provide a 7% dividend yield
Of course, the first step to building a portfolio capable of providing a 7% yield is stock picking.
I would likely seek out five to 10 shares to invest between $2,000 and $4,000 into, thereby diversifying my portfolio and reducing potential risks.
That's particularly important, as past performance doesn't guarantee future performance. A dividend giant today may well be relatively average in 12 months' time – just ask Fortescue Metals Group Limited (ASX: FMG).
Perhaps surprisingly, I wouldn't even consider a company's yield when seeking stocks to buy.
My ultimate goal is to achieve a 7% yield, not just today but also over the years to come.
Thus, I would focus on finding quality companies I like as long-term investments. Personally, I believe a quality business is one offering both a strong balance sheet and competitive advantages over its peers.
Having found a few such businesses, I would consider if they're trading at a good price. If they are, then I would look at their dividend yield.
A game of averages
Fortunately, to achieve a 7% yield across five to 10 ASX 200 shares, I could buy various stocks with various yields.
Rio Tinto Limited (ASX: RIO), for instance, offers an 8% dividend at the time of writing. Meanwhile, Australia and New Zealand Banking Group Ltd (ASX: ANZ) shares are trading with a 6% yield.
Together, they could see an investor realising a 7% yield that may be better protected against a downturn in either the banking or materials sector.
Finally, I wouldn't necessarily 'set and forget' my new dividend-paying portfolio.
While passive income is, indeed, passive, it might need tweaking from time to time to continue providing my targeted income stream.
Keeping an eye on my investments and rebalancing my portfolio as needed will likely allow me to continue reaping my targeted 7% yield.
