ASX shares can be used to create strong passive income and this can steadily replace an investor's wages.
ASX dividend shares that provide a good dividend yield and generally provide investment income stability can be very attractive because of the easy way that we can get cash paid into our bank accounts every three months or six months.
With how much disruption there has been with the economy, inflation and interest rates, it might be wise to find companies that would be resilient.
The first thing I'd want to look at when deciding what to invest in is the dividend history.
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Past dividend performance
The past is not necessarily a reliable indicator of the future when it comes to dividends.
Having said that, I believe that businesses that have a record of paying stable and growing dividends to investors are a good place to start looking because, if they're in a resilient industry, there may well be a good chance of further growth.
There's not much point, in my view, in owning an ASX share for passive income to boost my earnings if that dividend is then going to disappear when I may need it most in a recession.
For example, investment house Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) has grown its annual ordinary dividend every year since 2000. Not many ASX shares have grown their dividend every year since the GFC. It has paid a dividend every year since it listed 120 years ago.
While it doesn't quite have the same consecutive annual dividend growth streak, Brickworks Limited (ASX: BKW) hasn't cut its dividend in over 45 years thanks to its diversified asset base.
Energy infrastructure ASX share APA Group (ASX: APA) has grown its annual distribution every year since 2004.
Pathology giant Sonic Healthcare Ltd (ASX: SHL) has grown its dividend in most years over the past three decades.
There are more businesses to consider than just those four names. For example, plenty of businesses haven't been listed on the ASX for 20 years yet – perhaps an ASX share only listed five years ago but it has grown its payout every year since then.
Dividend yield
I'd also want to see that I'm getting a good dividend yield from the potential investment considering savings accounts now offer better rates.
A dividend yield is simply the result of the current valuation and what the dividend payout ratio is.
I want to be rewarded for owning ASX shares, though what counts as a good dividend yield can be different for each business.
For example, I'm expecting that Shaver Shop Group Ltd (ASX: SSG) shares are going to pay a grossed-up dividend yield of more than 10% in each of the next couple of financial years. The company has said it has an intention to keep growing the dividend.
But, I'd be happy to get a grossed-up dividend yield of 4% from Soul Pattinson shares because of how it operates.
A $1,000 investment at a 10% dividend yield means $100 of extra money to supplement my wages, while a 4% yield would be $40. However, there's more to shares than just the dividend.
Earnings growth and valuation
If we're going to buy an ASX share for passive income, I'd like to see that there's a good chance of long-term capital growth, even though we can't control how the short-term goes.
The first step to help make capital returns is to try to buy at a good price. That could mean looking at a good investment after the price has dropped, when it's at a lower price/earnings (P/E) ratio than normal or at an appealing discount to the net asset value (NAV).
The other major thing that can help drive the share price higher is earnings growth. Profit isn't necessarily going to grow every single year, but over the long-term, it can make a big difference to whether an ASX share grows in value.
