I'm planning to utilise ASX dividend shares to build a passive income stream to reach $1,500 per month (and hopefully more). I think it's achievable for a lot of households to earn this amount over the long term. I'm in my 30s, but I believe I could still achieve this goal if I were 40 with no savings.
The great thing about investing in Australian companies is that not only do many of them pay attractive cash dividends, but those payments also come with franking credits. Those credits boost the after-tax cash return for many investors and reduced the taxes owed for investors in a high tax bracket.
We don't magically start with a portfolio earning $18,000 a year, or $1,500 a month. I believe there are three important steps we need to take to get to that target level of passive income.
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Save regularly
To invest, we need to have money to put into the ASX share market.
To have money, we need to spend less than we earn, regularly, and put that aside to invest.
What would it take to find $500 a month or $1,000 a month to invest in the ASX share market? Maybe it wouldn't be difficult at all. Perhaps it might take making a couple of frugal changes. For some households currently, just covering the basics could be a challenge, so finding $500 a month may not be possible right now.
But, for people who can put some savings aside, that's what I would do – put the cash into a high-interest savings account until we've reached (at least) around $1,000 to invest.
The earlier we can start investing, the more time we give our investments to grow and the less money we need to invest ourselves to reach a particular monetary target.
Invest in ASX dividend shares
Investing $1,000 every month, or every two months, or even just once a year, is a helpful amount for growing wealth.
I particularly like the concept of investing in ASX dividend shares because they can deliver a combination of passive income and, hopefully, capital growth.
Dividends aren't guaranteed — of course, they can be cut. But diversification is our friend here. By investing across a variety of different businesses, we can ensure that the dividend income is strong. I'd focus on businesses with a strong market position that look like they're going to keep growing their profits which, in turn, can fund higher shareholder payments.
I'll give some examples of some S&P/ASX 200 Index (ASX: XJO) dividend shares that offer solid yields and could pay larger dividends in the coming years. The following are from Commsec projections for FY24.
Wesfarmers Ltd (ASX: WES), the owner of Bunnings and Kmart, could pay a grossed-up dividend yield of 5.4% in FY24.
Telstra Group Ltd (ASX: TLS) might pay a grossed-up dividend yield of 5.9%.
Coles Group Ltd (ASX: COL) could pay a grossed-up dividend yield of 5.3%.
Washington H. Soul Pattinson and Co. Ltd (ASX: SOL), an investment business, is projected to pay a grossed-up dividend yield of 3.6%.
There are other ASX dividend shares that could be good choices for long-term passive income, but those four could be a solid starting point, particularly with Australia's population growth as a tailwind.
Be patient and benefit from compounding
Getting to $1,500 per month wouldn't be a quick process.
Using those four above businesses, the average FY24 grossed-up dividend yield for them is around 5%, so to get $18,000 a year we're talking about a portfolio that's $360,000 in size.
The long-term return of the ASX share market has been 10% per year but let's conservatively assume the above four names achieve an average return per annum of 9%.
If I can invest $1,000 a month, re-invest the dividends, and the ASX shares achieve 9% total growth per year, it would take less than 16 years to reach my goal. If I were 40, I could reach my goal by the time I was 55.
Compounding can help us achieve more growth, so if I aimed to reach the $1,500 per month goal but started investing five years earlier (at 35), I'd only need to invest $590 per month.
It'd definitely be possible to achieve my goals at 40 years old but the earlier we start, the better.
