S&P/ASX 200 Index (ASX: XJO) stocks offer investors a great opportunity to potentially build a reliable passive income stream.
If I had no savings at 50 and was looking at retiring on passive income I'd be running my slide rule over ASX 200 dividend shares. Especially fully franked shares, which can provide some handy benefits come tax time.
Here's why.
What have ASX 200 stocks historically returned?
Over the past 10 years, ASX 200 stocks have returned an average of approximately 9% per year.
That's the total return, mind you.
Share price gains, or capital growth, represented much of those gains.
But almost half those total returns were derived from income or yield. Which is why I'd be looking for companies with lengthy track records of reliably paying out franked dividends. And ideally, ones that have been growing their dividend payouts over time, with strong growth outlooks.
Now the future, by definition, is unknown. Meaning the returns delivered by ASX 200 stocks over the next 10 years could be higher or lower than 9%.
But sticking with history as our guide, if I were to invest $1,000 per month in blue-chip stocks, my initial $12,000 investment from this year would be worth $51,931 when I retire in 17 years. (Assuming I retire at 67 and reinvest the dividends.) That's the magic of compound interest.
Of course, as I get closer to my retirement age, there's less time for that interest to compound.
If I were still investing $1,000 per month at the age of 66, and ASX 200 stocks were still returning an average of 9% annually, my final year's investment may only net me some $13,000 on the $12,000 invested.
Still, after 17 years of diligently investing in some of the top-income stocks in Australia, I would have built up a healthy passive income stream to bolster my retirement years.
Don't forget to diversify
Investing across a range of ASX 200 stocks involved in a range of sectors is one of the best ways to reduce volatility and risk.
That's especially important for older investors who will have less time to ride out any large, unexpected drops with a specific company or within a specific sector.
'Don't put all your eggs in one basket' is an overused expression for good reason.
Happy investing!
