ASX income shares can be the way for investors to achieve wonderful passive income. Dividends could be the way to unlock $500 per month, or even more.
Banks are now offering investors a higher interest rate on their savings. Finally. But, one of the drawbacks of bank interest compared to dividends is that if investors want growth of the passive income, they need to re-invest the interest. But, businesses can both pay dividends and grow profit, enabling a bigger dividend payment next year, so the investor can keep spending the dividends and yet get pay rises.
However, while most competitive savings accounts offer a fairly similar interest rate, the dividend yields of ASX income shares can be very different.
Dividend yields can range from under 1% to over 10%.
Dividend goals
Achieving a monthly passive dividend income of $500 is an admirable goal. That's a real cash flow boost to someone's personal finances.
Getting $500 per month is the equivalent of getting $6,000 per year. Someone can do quite a lot with $6,000, though not as much as before all of the inflation occurred.
How much someone needs to make $500 per month or $6,000 per year, entirely depends on the average dividend yield of the ASX income share portfolio.
If the portfolio had a 5% dividend yield, then an investor would need to have a $120,000 portfolio.
With a 7.5% dividend yield, to make $6,000 per year we'd be talking about an $80,000 portfolio.
A 10% dividend yield would mean investors would only need a $60,000 portfolio, though businesses paying that high of a yield may not be the most reliable.
However, a 2.5% dividend yield would require a portfolio worth $240,000.
With a dividend yield of just 1%, a portfolio would need to be $600,000 in size.
Which ASX income shares to buy?
It's up to investors to decide how much dividend income they're aiming for.
Each business comes with its own risks and growth plans.
The company's price/earnings (P/E) ratio can have an important impact on the dividend yield. The higher the P/E ratio, the lower the dividend yield. A company's dividend payout ratio from the profit can also have a major impact on what the dividend yield is.
For example, in FY23, ASX income shares like Telstra Group Ltd (ASX: TLS) and Wesfarmers Ltd (ASX: WES) could pay grossed-up dividend yields of around 6%, while a bank like National Australia Bank Ltd (ASX: NAB) could pay a grossed-up dividend yield of over 8%.
However, I think it's integral that investors look for businesses that can grow profit. Growing profit means it's much more likely that the business can maintain and grow its dividend. I think it's also more likely that share price growth will occur over time.
That's why I prefer to look at ASX income shares with mid-to-lower-single-digit yields because I think, generally, they're more likely to be re-investing and growing. I regularly write about some of the names I own in my portfolio.
