You don't need to be saving a fortune to set yourself on a path to earning a rewarding passive income with ASX dividend shares.
In fact, if you're saving just $200 a month to invest in the stock market, you could be earning $31,012 per year in passive income to boost your retirement, or even hang your hat up early, sooner than you might think possible.
Here's how I'd go about it.
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ASX 200 dividend shares for passive income
First, I'd broadly (though not exclusively) stick to the larger dividend-paying stocks listed on the S&P/ASX 200 Index (ASX: XJO). These tend to be less volatile than some of the smaller-income stocks.
I'd also look for companies with long track records of making regular dividend payouts to shareholders, through both the good times and the leaner ones. This will lessen the odds of my passive income stream taking an unexpected hit.
I also have a preference for companies that offer franking credits, allowing me to potentially hold onto more of that dividend income at tax time.
And I'd be sure to do thorough research, or secure expert advice, before investing my hard-earned savings into a stock that appears to be paying a high yield, only to discover that's because its share price has been in free fall in recent months with limited prospects of improvement.
When you're investing for passive income, don't lose sight of the fact you still want to own quality companies, with top management teams, sizeable barriers to entry, and operating in a market that offers growth opportunities.
Finally, over time, I'd spread my investments over a range of stocks (say 10), operating in various sectors and regions. This way, if any particular company or sector hits a rough patch, my broader income portfolio should still be in good shape.
After that, it's a question of patience.
The magic of compounding
While I'd eventually invest in 10 or so diversified ASX 200 dividend shares for my $31,012 annual passive income, for the purposes of this article we'll narrow that down to one.
Namely, ASX 200 bank stock Australia and New Zealand Banking Group Ltd (ASX: ANZ).
I'm choosing ANZ here because the bank's shares have gained 12.8% over the past 12 months. And even after that solid run, the stock still trades on a partly franked trailing yield of 6.8%.
That comes thanks to a very profitable year.
For the 12 months ending 30 September, ANZ reported an all-time high cash profit of $7.4 billion, up 14% from the prior year.
I also think that 6.8% is a sustainable, long-term yield most investors should be able to get from their passive income portfolio.
Adding in share price gains, we should be able to achieve total annual gains north of 10%. That's based on the S&P/ASX 200 Gross Total Return Index (ASX: XJT). The Total Return Index, which includes all cash dividends reinvested on the ex-dividend date, is up 30.1% over the past three years.
Now here's where the magic of compounding comes into its own.
Investing only $200 a month with a 10% annual return will see my portfolio grow to $41,510 in 10 years, $153,339 in 20 years, and $456,065 in 30 years.
Now, if I'm earning a 6.8% dividend yield on that portfolio that will give me a $31,012 annual passive income, without having to touch that accumulated capital.
Hello retirement years!
