Investing in S&P/ASX 200 Index (ASX: XJO) shares can be a rewarding strategy. Indeed, the index has gained 23% over the last five years – that's a 4.6% average annual return before considering dividends.
On that note, what if passive income was my investing goal? Many ASX 200 shares provide dividends twice a year.
Here's how I'd build a $7,500 annual passive income by investing $100 a week in ASX 200 dividend shares.
Image source: Getty Images
Why I think ASX 200 shares can be attractive investments
I am personally a fan of investing in ASX 200 companies. As the name suggests, the index houses 200 of the Aussie bourse's largest and most influential companies.
ASX 200 shares boasted an average market capitalisation of around $11.4 billion at the end of last quarter, according to data from the S&P Global. That means most could be considered blue-chip stocks – known to generally offer greater stability and security through the market's ebbs and flows.
Not to mention, ASX 200 shares offer an average dividend yield of 4.58%. That's certainly nothing to scoff at!
Such a yield could turn a decent weekly investment into a substantial annual income, thanks to the power of compounding.
Building a $7,500 passive income with ASX 200 stocks
I think I could muster up $100 to invest each week and continue doing so consistently over the coming years.
At that rate, I could sink $5,200 a year into ASX 200 shares – enough to provide $238.16 of passive income annually.
While any extra cash is welcome, that amount probably won't stretch far. So, instead of spending it, I plan to reinvest my dividends, using them to buy more stocks – thereby compounding my returns.
Here's how this strategy could work to build my nest egg substantially over the coming decades, all before considering share price gains:
| Years invested | $ invested | Portfolio value |
| 1 | $5,200 | $5,200 |
| 5 | $26,000 | $28,493 |
| 10 | $52,000 | $64,137 |
| 15 | $78,000 | $108,726 |
| 20 | $104,000 | $164,505 |
That's right, only considering the power of compounding dividends, my $100 weekly investment could grow into a $164,505 portfolio in two decades.
At that point, it would be capable of providing more than $7,500 of passive income each year.
Just imagine how much it could provide if the value of my shares were to grow by 4.6% annually as well.
Of course, all that assumes ASX 200 shares will continue to pay an average dividend yield of 4.58%, and past performance isn't an indicator of future performance. It's also important to remember that no investment is guaranteed to provide returns.
Could I speed up the process?
But what if 20 years was a bit too long of an investment timeline? Well, there are plenty of ASX 200 shares offering above-average dividend yields.
Some such stocks include ANZ Group Holdings Ltd (ASX: ANZ), Harvey Norman Holdings Ltd (ASX: HVN), Woodside Energy Group (ASX: WDS). They currently boast respective yields of 6%, 8.4%, and 11.1%.
Though, a high dividend yield doesn't necessarily make a good passive income buy.
