I love receiving dividends from ASX dividend shares. Getting cash payments without having to do any work for it is very rewarding. But what do we need to do to receive $500 per month?
Dividends are not just created out of thin air – they are paid from the profits that a company has generated in that financial year or prior financial years.
The board of directors of that company decide how much of a dividend to pay. Some businesses may want (or need) to hold onto a lot of the cash because they need the money to expand or improve the balance sheet.
Dividend yield
To get $500 of monthly dividends, we're talking about receiving $6,000 of annual dividends. There are very few ASX shares that pay monthly, so to build a $500 monthly passive income, we'd need a portfolio of different ASX dividend shares paying in different months. Or, we can just think about an annual target and divide that into 12 slices ourselves.
Let's think about a $6,000 annual target.
If our portfolio had an average dividend yield of 10%, then the portfolio would need to be $60,000 in size. Aiming for huge yields is not advisable if we want the dividend to be resilient, as big yields are more likely to be cut.
Lowering the target dividend yield a bit to 7.5% would increase the required portfolio value to $80,000.
If we aimed for a dividend yield of 5% for the portfolio, it'd mean a portfolio value of $120,000 would be the goal.
ASX growth shares also pay dividends, though the yield is often lower because of a higher price/earnings (P/E) ratio. A portfolio of ASX growth shares with an average dividend yield of 2.5% would mean we'd need $240,000 to get $6,000 of annual ASX dividends.
How to build an ASX dividend portfolio
Investors have a few different options for how to build up their portfolios.
We could put our investing cash straight into those high-yield ASX dividend shares.
Investors could decide to invest in an exchange-traded fund (ETF) and build towards the dividend/portfolio value targets.
Or, we could invest in faster-growing ASX shares that are growing dividends and benefit from compounding. At some point, we could decide to sell some and switch to higher-yielding names, or simply stick with the lower-yielding options and benefit from growth.
Whichever path we pick, I'll give a compound interest example of how much money we might need to invest. If we invest $500 per month into our portfolio (or $1,000 every two months to save on brokerage), then the portfolio would grow to around $128,000 if the returns are an average of around 10% per annum for 12 years.
