Is the daily grind wearing you down? ASX dividend shares – and the income they provide – could prove to be your ticket out of the rat race.
While investing on the ASX for passive income may sound like a daunting task, it needn't be difficult or inherently risky.
There's plenty of jargon out there aiming to explain how the market moves, but I think economist Ben Graham explains it best:
In the short run the market is a voting machine but in the long run it is a weighing machine.
Day to day, the market moves on investor sentiment – a tide that is notoriously difficult to predict. However, over the weeks, months, and years, share prices will typically rise (or fall) alongside a company's earnings.
Indeed, buying shares in an ASX-listed company is essentially the same as buying a portion of its business. And said businesses can choose to pay out a portion of their profits to their shareholders – with the payments known as dividends.
So, how might an investor replace their salary with dividend income from ASX shares? Keep reading to find out.
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How much dividend income do you need to quit your job?
The first question answer before one can kick off their plan to replace their wage with dividend income is: How much passive income do you need?
The answer will vary from person to person. It will likely depend on your lifestyle, your living situation, and how you like to spend your time.
A good place to start might be The Motley Fool Australia's Retirement Guide.
It states that to live a 'comfortable' lifestyle a single Australian is estimated to need around $46,000 of annual income. Let's use that as our target.
Building a passive income stream from ASX shares
According to S&P Global data, the S&P/ASX 200 Index (ASX: XJO) – housing 200 of the ASX's biggest companies – has provided an average annual total return of 8.18% over the last decade. It also boasts an indicated dividend yield of 4.58%.
At that rate, one would need a portfolio worth around $1 million to receive $46,000 of annual passive income.
That might sound like an unachievable sum. However, thanks to the power of compounding it can be built up over the years.
Here's how investing $200 each week could grow a person's portfolio to be worth more than $1 million:
| Years invested | $ invested | Portfolio value (8.18% return) | Dividend income (4.58% yield) |
| 1 | $10,400 | $10,400 | $476.32 |
| 5 | $52,000 | $61,232 | $2,804.42 |
| 10 | $104,000 | $151,954 | $6,959.49 |
| 15 | $156,000 | $286,369 | $13,115.70 |
| 20 | $208,000 | $485,521 | $22,236.86 |
| 25 | $260,000 | $780,586 | $35,750.83 |
| 30 | $312,000 | $1,217,759 | $55,773.36 |
Though, no investment is guaranteed to provide returns or downside protection. Additionally, past performance isn't an indication of future performance.
How to invest on the ASX
Now, we come to buying ASX dividend shares.
There are over 2,200 companies listed on the ASX. Of those, many pay two dividends a year.
Choosing which to invest in will depend on multiple factors, many of which are unique to an individual investor.
Things you might want to consider include your risk tolerance, long-term goals, and the time you have to spend stock picking.
A risk-averse investor might choose to invest in a highly diversified portfolio and focus on blue-chip stocks. One who is aiming for market-beating returns might focus on growth stocks. A time-poor investor might fork out for exchange-traded funds (ETFs).
Fortunately, The Motley Fool Australia has created a beginner's guide to investing in ASX shares with all that up-and-coming investors need to know to make the most of the market.
