S&P/ASX 200 Index (ASX: XJO) shares that pay passive income can enable savvy investors to quit work and live off the dividends.
Readers have likely heard of some of the largest dividend-paying ASX 200 shares such as Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), BHP Group Ltd (ASX: BHP), and Woolworths Group Ltd (ASX: WOW).
These shares can provide reliable dividend income, but how much do you need to invest to quit work and live off your dividends?
Dividend goals
Each person will a different view on what their life would look like if they were living off dividends. If you're picturing buying a Ferrari and flying first class, then you'd need a lot more dividend income than the average person.
For this exercise, it's the average household that we're going to examine.
While we're not talking specifically about going into retirement, it can be a good starting point. The Motley Fool retirement guide says:
The Association of Superannuation Funds of Australia (ASFA) has estimated that to support a 'modest' lifestyle in retirement, singles need a yearly income of $29,139 and couples $41,929. A 'comfortable' lifestyle, with a broader range of leisure activities, requires a yearly income of $45,962 for singles and $64,771 for couples.
Those figures assume the retiree(s) owns their own home. Also, those figures can be "greater than household income after income tax" as retirees can draw down on capital over the retirement period.
Ideally, someone significantly younger than 70 doesn't want to be steadily selling their ASX 200 shares – they probably have decades to live.
As well, most younger people don't have a paid-off home. If that's the case, it would probably be a good idea to allow for at least an extra $24,000 per year to pay for the roof over your head.
Assuming a single person wanted to comfortably retire, I'd suggest they'd need around $70,000 in dividend income.
How much needs to be invested in ASX 200 shares?
It's tricky to know what the dividend yield of the ASX 200 will be over the next 12 months or, indeed, many years from now.
So, let's assume a 4% dividend yield (excluding franking credits) for now, considering the ASX 200 is dominated by ASX mining shares and ASX bank shares. These typically have higher-than-average dividend yields.
I'm also assuming the franking credits largely take care of the tax owed on receiving these dividends, so I'm not including those as useable passive income.
To get $70,000 of cash for a comfortable life, we're talking about a portfolio worth $1.75 million. Aiming for less would obviously mean a smaller investment portfolio target.
Not many people have $1 million or $2 million sitting around in cash just waiting to be invested. But we don't need to invest that much ourselves. I'm not advocating investing in ultra-high-yield ASX 200 shares, but we can grow wealth by investing in growing businesses and benefiting from compounding.
For example, investing $1,000 a month into ASX 200 shares that grow by an average of 10% per annum (including re-investing dividends) could be worth $1.78 million after 29 years. Winning the lottery or inheriting that sum would make the dividend dream come sooner, but we don't know what's going to happen next.
One tactic for investors could be to choose ASX 200 shares that could deliver good growth and pay good dividends through that growth journey.
These ASX 200 shares could pay good dividends now and in the future: Wesfarmers Ltd (ASX: WES), Premier Investments Limited (ASX: PMV), Lovisa Holdings Ltd (ASX: LOV), Washington H. Soul Pattinson and Co. Ltd (ASX: SOL), Brickworks Limited (ASX: BKW), and Metcash Ltd (ASX: MTS).
By regularly investing in quality ASX 200 shares, investors could unlock a comfortable lifestyle thanks to dividends.
