Flaming hot inflation and raging interest rate rises are taking their toll on how far the average Aussie earnings can stretch. It's times like these that passive income from dividend-paying S&P/ASX 200 Index (ASX: XJO) stocks become all the more valuable.
An extra $1,800 each year can go a long way to easing some of the financial strain. Yet, despite a 4% return on cash savings now being a reality, you'd need to stash $45,000 to earn $1,800 annually.
That's why I'd personally be much more inclined to invest in Australia and New Zealand Banking Group Ltd (ASX: ANZ) instead. The big four bank has filled its shareholders' pockets with a generous $1.46 worth of fully franked dividends this year.
Notably, the exceptional 6.2% yield is not the product of an abnormally high payout this year. In the last 10 years, ANZ has typically paid between $1.40 to $1.80 in dividends per share.
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Out of all the ASX bank stocks, why ANZ?
You might be thinking: ANZ is the only big four bank in the red compared to a year ago, why would you want to invest in it for passive income? To that I say, great question, thanks for asking! So here's my reasoning…
While it is true ANZ is the worst-performing ASX big four bank stock in the last 12 months, based on its share price — fundamentally it is the best, at least in my eyes.
Compared to a year ago, the smallest member of the major four has dialled up its earnings the most. Net profits increased 15.5% year-on-year, while its peers were hard-pressed to break a 10% clip.
In addition, the potential acquisition of Suncorp could bolster ANZ's loan book with a further $47 billion in home loans and $11 billion in commercial loans.
Even with the potential upside, ANZ appears to be trading at a discount to its peers. Right now, the price-to-earnings (P/E) ratio on ANZ is hovering around 10 times. Meanwhile, the bigger end of town is fetching between 13 to 18 times earnings.
Paving the way to $1,800 passively
The most important component in this assessment is ANZ's passive income potential. In the big four landscape, the blue bank offers the biggest dividend yield at 6.2%.
Now, to generate $1,800 per year in income from this dividend investment, one would only need to buy six shares a week over four years — based on the current share price. The table below outlines the journey of a willing investor.
| Year | Number of shares | Annual income |
| 1 | 312 | $455 |
| 2 | 624 | $911 |
| 3 | 936 | $1,367 |
| 4 | 1,248 | $1,822 |
If all went to plan — and ANZ continues to offer a similar dividend — in four years' time, $1,822 would be flowing in passively.
Earlier in the article, I highlighted how $45,000 would be required to generate the same income. Whereas, the ANZ route would require a more manageable $29,465 investment over four years.
It might still seem like a lot now, but at $142 per week, it quickly adds up. And don't forget — unlike cash, your initial investment in an ASX stock can appreciate in value over time.
