I have a main job already, but I have a goal of achieving strong dividend income from ASX income shares. If it grows enough, it could be a pleasing second income for me.
There are plenty of ASX blue-chip shares that have quite high dividend yields, such as Commonwealth Bank of Australia (ASX: CBA) and BHP Group Ltd (ASX: BHP). They offer much higher yields than the iShares S&P 500 ETF (ASX: IVV), which only has a 1.35% dividend yield.
Investors can do just fine with an index-tracking exchange-traded fund (ETF) such as Vanguard Australian Shares Index ETF (ASX: VAS).
But, I think there are a group of ASX income shares that can deliver a combination of good dividends and compounding growth.
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Building a second income
Metcash Ltd (ASX: MTS) owns brands such as Mitre 10, Home Timber & Hardware, and Total Tools, while supplying businesses such as IGA, Bottle-O and Cellarbrations. It could pay a grossed-up dividend yield of around 8% in FY23 according to Commsec.
Premier Investments Limited (ASX: PMV) has a number of retail brands including Smiggle, Peter Alexander, Just Jeans and Jay Jays. It's projected to pay a grossed-up dividend yield of around 7% in FY23 according to Commsec.
Shaver Shop Group Ltd (ASX: SSG) owns a network of stores selling hair removal products. It's valued at just 8 times FY23's estimated earnings with a grossed-up dividend yield of around 14%.
Adairs Ltd (ASX: ADH) operates three different brands – Mocka, Focus on Furniture and Adairs, selling furniture and homewares. According to Commsec, it's valued at just 8 times FY23's estimated earnings with a grossed-up dividend yield of 10.6%.
Bailador Technology Investments Ltd (ASX: BTI) is a tech investment business that is invested in a whole group of fast-growing tech companies. It has an expected grossed-up dividend yield of 7.8% at the current valuation.
If I invested the $20,000 equally between these ASX income shares, meaning $4,000 in each, we'd get an average dividend yield of around 9.5%. In the first year, that would be a cash payment of $1,900. That's short of my target of at least $6,000, but I wasn't expecting to be able to make $6,000 passive income from a $20,000 investment – that'd be a yield of 30%.
Long-term dividend re-investment
Compounding can play a key role in the future. Re-investing the dividends we receive can build the portfolio value and dividend income.
Let's assume I re-invest all the dividends and franking credits, but ignore the effects of dividend growth, share price growth and tax owed to the ATO to keep the calculation as simple as possible.
After 15 years, it could grow into a $78,000 portfolio. The portfolio would only need to yield 7.7% to generate $6,000 of annual passive income. That'd be a solid second income after 15 years, from just the original $20,000.
There's also a danger that there could be dividend cuts and is worth noting that inflation can hurt the value of that income.
But, hopefully there would be plenty of dividend growth from the names I named above. This could help the second income grow even higher than my back-of-an-envelope calculation.
