The ASX share market can be a great place to find opportunities that deliver passive dividend income and growth. In this time of strong inflation, having a second income would be very helpful.
We can find dividend yields of more than 10% on the stock market, though some of them may not be the most sustainable payers around.
I'm not going to say that on day one, a $5,000 ASX investment can achieve $4,000 of dividends. That'd be a dividend yield of 80%! However, compounding can do a lot of the work for us over time.
Investing $5,000 into the S&P/ASX 200 Index (ASX: XJO) might only yield $200 to $250 over the next 12 months, depending on what the dividend payments are.
Compounding and dividends
Dividends are not guaranteed payments. They are decided by the boards of companies and paid from the profits that a company has made.
Share prices can move around quite significantly from month to month. It depends on how optimistic or pessimistic the market is feeling.
Dividends can provide a much smoother ride compared to the volatility of share prices.
One of the best things that we can do with our dividends is re-invest them, either through the dividend re-investment plan (DRP) or take them as cash and then choose which ASX shares to re-invest them in.
How to make a second income
For example, if a $5,000 investment in a company pays $350 of dividends, that would be a 7% dividend yield. Ignoring the potential of the company growing its dividend payment per share, re-investing the $350 would unlock another $24.50 of dividends in the following year, and the share value portfolio would be increased by $350. The 'interest' is earning interest.
In year two, the $5,350 share portfolio value would pay $374.50 of dividends, and re-investing would unlock another $26.21 in the following year.
And so on.
If we follow through on this, then after 37 years, we could be generating more than $4,000 of dividend income.
Other factors to consider
There are a number of other things to keep in mind. Firstly, a good ASX investment is likely to increase its dividend over the long term. And in my example, I didn't account for any potential changes in the share price, the possibility of franking credits or tax owed on dividends.
In addition, I didn't add any extra money to the investment. If I invested $5,000 and then added $500 every month to my portfolio, it would unlock a lot more dividend income than just $4,000 of passive income.
Which shares?
There are plenty of ASX dividend shares to choose from. But out of the biggest 20 companies on the ASX, Wesfarmers Ltd (ASX: WES) could have a high chance of long-term growth over the decades while paying a growing dividend over time.
This is thanks to the diversified nature of its portfolio, its ability to invest in multiple sectors and the strong business brands it owns.
