Passive income: How much should you invest to earn $5,000 in annual ASX dividends

When it comes to passive income, I prefer ASX 200 shares with a reliable track record of making regular, fully franked dividend payments.

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Does an extra $5,000 a year of passive income from ASX dividends sound good to you?

Me too!

That's almost $100 every week, which I'm sure will come in quite handy in retirement.

Which brings us to our headline question.

Just how much do you need to invest in ASX dividend shares to earn that $5,000 yearly passive income.

Let's get to it.

$5,000 of passive income from ASX dividend shares

Now, the first thing we need to do is decide which ASX dividend shares we're going to invest in.

My preference goes to larger companies, generally trading on the S&P/ASX 200 Index (ASX: XJO), with lengthy track records of making regular dividend payments.

I also lean towards companies that pay fully franked dividends. That should enable me to hold onto more of my passive income when it's time to pay the ATO their pound of flesh.

If you're going to invest in individual stocks, you'll want to build a portfolio of at least 10 ASX dividend shares, operating in various sectors. This will reduce the risk of your passive income taking a big hit if headwinds strike any singular company or particular sector.

Some high-yielding ASX 200 dividend stocks to consider include:

Alternatively, you can target that passive income by investing in a high-yielding ASX exchange traded fund (ETF).

The BetaShares Australian Dividend Harvester Fund (ASX: HVST), as one example, provides exposure to a diversified portfolio of 40 to 60 ASX dividend shares. And the ETF pays out dividends (currently franked at 77%) on a monthly basis.

As at 31 October, the 12-month yield was 7.4%. The 12-month grossed-up yield, which includes franking credits, is 9.9%.

How much do you need to invest?

How much you need to invest for your $5,000 annual passive income will come down to the average yield you earn. And remember, future yields may be lower or higher than past yields.

But I believe the 7.4% yield delivered by HVST over the past 12 months is a realistic long-term return to aim for.

That means, if I wanted to get to my $5,000 passive income stream with a single investment, I'd need to invest $67,568 today.

Now, for most of us, that's a big chunk to invest in one go.

But that's okay.

Investing is a long game.

I can also reach my passive income goal by investing regular smaller amounts. Say $1,000 a month. With a little patience and diligence, I'll get there in good time.

Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended JB Hi-Fi. 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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