There are arguably two types of Australians: Those that relish the nine-to-five grind and those that don't. For those in the latter group, living a never-ending weekend while raking in a 'wage' probably sounds like a dream come true. Fortunately, ASX dividend shares can offer such passive income.
And building a 'wage' through investing in Aussie stocks need not be overly expensive.
I believe that by regularly setting aside funds to buy undervalued, high-quality ASX dividend shares, I could begin preparing an early retirement (or second wage) in 2023. Here's how.
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How much do I need to invest to see my wage in dividends?
As of August 2022, the average Australian employee was paid $1,250 each week, according to the Australian Bureau of Statistics. That's around $65,000 annually, pre-tax. So, let's use that as our base.
If one was to realise a notable – but not impossible – annual dividend yield of 8%, one would need an $815,000 portfolio to receive around $65,000 each year in dividend income.
If you're anything like me, that's far from pocket change! Fortunately, it doesn't need to be invested all at once. Here's how I would build it up over the years.
Building a portfolio using compounding
If I were aiming to build a portfolio of dividend shares capable of growing to be worth $815,000, I'd focus on compounding my earnings for now.
By reinvesting any dividend income in shares, I could build up my holdings without forking out extra cash.
I think I could put $250 of the average $1,250 weekly wage aside to invest.
If I did so, and I could realise an 8% yield while reinvesting all my dividends, my portfolio could be worth around $815,000 in under 24 years. That could feasibly see me retiring by 2047.
If I made some lifestyle changes, I could potentially stretch my wage further.
By investing $500 a week, I could reach my goal in under 17 years. That could potentially allow me to kick back for the remainder of my 'working' days from 2040.
Identifying ASX dividend shares to buy
Of course, realising a consistent 8% dividend yield is a hard – but not impossible – ask.
Right now, S&P/ASX 200 Index (ASX: XJO) companies like BHP Group Ltd (ASX: BHP), Woodside Energy Group Ltd (ASX: WDS), and Cromwell Property Group (ASX: CMW) each offer yields of around 8%.
Though, higher yields can also come with greater risks. On the other hand, a lower yield would increase the time it would take to reach my goal.
Fortunately, I think there's a middle ground. An investor buying ASX value shares that are also capable of paying dividends may find themselves receiving higher returns when their investment's true worth is realised.
Identifying value shares is notoriously tricky. And it's likely made trickier if one is seeking passive income on top. However, it can be done.
If that was my aim, I would analyse a company's business, its true value, balance sheet, and strengths and weaknesses to assess whether it might be able to grow its valuation and payouts in the future.
Still, even the most considered investment can't be guaranteed to provide either dividends or capital gains.
