Why work for your money when you can make your money work for you? That's the attitude employed by many S&P/ASX 200 Index (ASX: XJO) passive income investors as they hunt for winning dividend shares.
Certainly, investing in ASX 200 shares capable of providing a notable annual income needn't be an expensive venture.
Here's how I would invest $20,000 today if I were targeting $1,500 of dividends each year.
Creating $1,500 of annual income by investing just $20,000
Let's assume I have two goals – to create a $20,000 portfolio and to receive upwards of $1,500 each year without lifting a finger.
I could knock both goals out of the park today by creating a diverse portfolio of ASX 200 shares with an average dividend yield of at least 7.5%.
And that could be just the beginning. If I were to reinvest my dividends, the power of compounding could see my payouts growing substantially over the years to come.
Here's how I might hypothetically achieve my goal by investing in just four ASX 200 shares.
4 ASX 200 shares boasting an average 7.7% dividend yield
Realising an average dividend yield of more than 7.5% by investing in market giants might sound like a pipedream, but it can be done.
Here are four ASX 200 shares I might consider if my goal was to recognise upwards of $1,500 of annual passive income from a $20,000 portfolio:
| ASX 200 share | Share price as of Tuesday's close | Trailing dividend yield |
| Harvey Norman Holdings Limited (ASX: HVN) | $4.18 | 8.97% |
| CSR Limited (ASX: CSR) | $5.20 | 6.63% |
| BHP Group Ltd (ASX: BHP) | $48.01 | 9.65% |
| ANZ Group Holdings Ltd (ASX: ANZ) | $25.66 | 5.69% |
As of Tuesday's close, the four shares boasted an average dividend yield of 7.735%. But, of course, past performance isn't an indication of future performance.
Still, at that rate, $20,000 invested equally across the shares could yield around $1,547 of passive income annually.
I could think of a few ways in which I could spend that sort of extra cash. However, that's not what I would do.
The power of compounding
If I were able to receive around $1,500 of passive income each year, I would likely choose to reinvest it. By doing so, I could compound my earnings.
Let's assume I continue to recognise a 7.735% yield and none of my investments see any capital gains between now and 2033.
By reinvesting my dividends to buy more ASX 200 shares, I could double the value of my portfolio in that time without forking out any more cash. And my dividend income would likely grow alongside it.
