Have you got a spare $3,000 to invest?
Let's see how we can plough that into ASX dividend shares to eventually reap a nice passive income stream for the rest of your life.
Yes, life!
Get money for doing nothing until the day you die.
Three income stocks to sink your teeth into
Any great portfolio needs diversification, so I will choose three ASX shares as our examples: BHP Group Ltd (ASX: BHP), Viva Energy Group Ltd (ASX: VEA) and APA Group (ASX: APA).
While BHP is facing some headwinds with the global — especially the Chinese — economy struggling, historically it has shown to produce decent dividends and maintain a reasonably stable valuation for a cyclical stock.
Remembering the past is no indicator of future performance, BHP currently pays out a dividend yield of 8.5% that's fully franked.
According to CMC Markets, seven out of 12 analysts currently rate service station and oil refinery owner Viva Energy a buy.
Realising that petrol is a sunset industry, the operator of Shell and Liberty brands is adapting its business to put more emphasis on convenience retail and even electric charging.
Viva shares are outputting a very handsome 8.6% dividend yield, which is fully franked like BHP.
APA Group (ASX: APA) also sits in the energy industry, but is involved in gas and electricity, and is more of an infrastructure business than Viva.
Admittedly the dividend yield is not as impressive as our other two stocks, currently sitting at 5.45% with no franking.
But The Motley Fool's Tristan Harrison noted back in May how APA Group has a track record of raising its distributions.
"It has used the growing profit to pay a distribution, which has increased every year for almost 20 years," he said.
"It's a pleasing combination for shareholders that APA has been able to invest in more assets and keep growing its dividend income. I think it will still be supplying energy to Australians a few decades from now."
Harrison added that APA is one of those rare shares that thrive with inflation.
"A large majority of the ASX 300 share's revenue is indexed to inflation, so APA is seeing revenue growth thanks to stronger inflation while boosting earnings and cash flow.
How to supercharge the passive income
So how are we going to extract some passive income out of this portfolio?
Firstly, we need to grow that $3,000.
At that stage, even with 10% dividend yields post franking, you're only going to harvest $300 of passive income per year, which isn't very much.
Therefore, let's immediately invest those dividends back into your portfolio, and commit to adding $500 each month to the pot.
The yield out of those three stocks averages out to be 7.5%.
This means that after 10 years, your $3,000 will have grown to $91,000.
From here, if you stop reinvesting the dividends, you can rake in $6,825 of passive income each year.
Can you wait 15 years before turning on the income tap? Then you'll be working with a pot of $132,500.
So from year 16 your bank balance will welcome $9,937.50 of passive income per annum.
All these calculations are taking the conservative side by not assuming any capital growth from the portfolio and ignoring franking.
Sweet action.
