How much do I need to invest in ASX income shares to earn $400 a month?

Curious about dividend income? Let's look at the possibilities.

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ASX income shares are capable of delivering pleasing and consistent dividends to investors.

The great thing about passive income is that we don't need to do any work for the cash to keep rolling in every time.

There are very few investments that pay a dividend every month, so it may be wiser to think of a monthly goal, such as $400 per month. That means we're talking about a $4,800 annual goal.

Let's go back to the main part of the question for the article – how much do I need to invest? The dividend yield plays a key role.

Dividend yield

We can think of the dividend yield as sort of like the interest rate on a savings account.

The higher the dividend yield, the less we need to invest in ASX income shares to create a certain amount of cash flow. For example, $100 invested in a business with a 2% dividend yield will generate $2 per year. A business with a 5% dividend yield will make $5 of dividend income.

However, I'll note now that higher dividend yields aren't necessarily better than lower ones – they may be more at risk of a significant dividend cut. And after all, the valuation of the asset that we're buying is very important. Hence, I don't think there's much point in getting a 10% dividend yield if the share price then falls 30%.

ASX income shares in action

If I were going to invest in a portfolio of businesses that had an average dividend yield of 2%, then I would need to invest $240,000 to achieve $4,800 of annual income.

A portfolio of companies with an average dividend yield of 4% would mean that I'd need to invest $120,000.

An average dividend yield of 6% would translate into a required amount of $80,000.

The final one I'll look at is a dividend yield of 8%, which would mean I'd need to invest $60,000.

There are a variety of businesses out there with different dividend yields.

For example, Brickworks Limited (ASX: BKW) hasn't cut its dividend for over 45 years, but its FY23 dividend equates to a grossed-up dividend yield of 3.6%.

Wesfarmers Ltd (ASX: WES) is the owner of Bunnings and Kmart, as well as many other businesses – it's projected to pay a grossed-up dividend yield of 5.9% in FY25.

Metcash Ltd (ASX: MTS) is a business that supplies IGAs around Australia and various independent liquor chains. It also owns some hardware brands including Mitre 10, Total Tools and Home Timber & Hardware. Metcash is forecast to pay a grossed-up dividend yield of 8%.

If I were focused on building a resilient portfolio focused on ASX income shares, I'd choose names with dividend yields between 3.5% to around 6.5%, though one or two businesses with yields above that could be solid picks, such as Metcash.

Motley Fool contributor Tristan Harrison has positions in Brickworks. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Brickworks and Wesfarmers. The Motley Fool Australia has positions in and has recommended Brickworks and Wesfarmers. The Motley Fool Australia has recommended Metcash. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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