The Australian share market is a great place to generate a passive income.
Every six months (sometimes even more frequently), a large number of ASX shares will share their profits with their shareholders in the form of dividends.
In light of this, if I had $20,000 sitting in a bank account, I would consider putting it into high-quality ASX shares that offer a reliable source of passive income.
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Where I would invest $20,000 in ASX shares for passive income
I'm going to split this $20,000 up into four $5,000 investments to add some level of diversity to my income portfolio.
The first ASX share I would buy for passive income is Westpac Banking Corp (ASX: WBC). The recent banking crisis has dragged bank shares notably lower, which I believe has created a compelling buying opportunity.
For example, not only does Goldman Sachs have a conviction buy rating and lofty $27.74 price target, it expects a generous fully franked 6.75% dividend yield this year and a 7.15% dividend yield in FY 2024.
What else?
Next up, I think Universal Store Holdings Ltd (ASX: UNI) would be another top option for income investors in the current environment. That's because this youth fashion retailer's target demographic is expected to continue spending largely as normal despite the cost of living crisis. This is underpinned by their limited exposure to rising interest rates and an increase in the minimum wage.
Morgans is a fan of Universal Store and has an add rating and a $6.85 price target on its shares. It is also forecasting fully franked dividend yields of 6% in FY 2023 and 7% in FY 2024.
Another ASX share that I would invest $5,000 into for passive income is Rio Tinto Ltd (ASX: RIO). I'm expecting some big dividends from this mining giant in the near term thanks to a combination of strong commodity prices and production growth.
Goldman Sachs also expects this to be the case. It is forecasting fully franked dividend yields of 6.7% in FY 2023 and 7.5% in FY 2024. The broker also sees plenty of upside for the miner's shares with its buy rating and $140.40 price target.
Finally, I think the Vanguard Australian Shares High Yield ETF (ASX: VHY) would be a great way to round out your passive income portfolio. It invests in a diverse collection of ASX shares that pay larger-than-average dividends.
At present, the ETF offers an estimated forward dividend yield of 5.4% and I would expect something similar the following year.
What passive income would these shares generate?
Based on the above, the four investments would have an average dividend yield of 6.2% in FY 2023 and 6.75% in FY 2024.
This means that a $20,000 investment would yield passive income of approximately $1,250 in the first year and then $1,350 in the second year.
And, don't forget, there's potential for capital returns on top of these dividends!
All in all, I feel this would be a great starter portfolio for investors seeking passive income.
