Aiming for a lifestyle-boosting passive income from S&P/ASX 200 Index (ASX: XJO) shares?
Here's how I'd go about building a $13,080 annual passive income by investing $5,000 in ASX 200 dividend stocks today.
Diversification, franking credits and patience
First, I'd have to be realistic about my timeline.
We'll look at some potential time horizons below, and how I can make the magic of compounding work in my favour.
But unless I can find an ASX 200 stock yielding north of 250% (I can't!), I won't garner my $13,080 in annual passive income from a $5,000 investment overnight.
Second, I'd work to build a diversified portfolio of ASX 200 dividend shares, operating in various sectors and geographic locations. That will lower the risk of my income portfolio taking a big unexpected hit if one company or sector comes under pressure.
With $5,000 to invest, I'd stick with four high-yielding stocks for now. As my portfolio grows, I'd sell some of those holdings and expand that portfolio to 10 or so ASX shares.
And the third thing I'd aim for is ASX 200 dividend shares offering full franking credits. That will let me hold onto more of my passive income when the tax man comes knocking.
Four ASX 200 dividend stocks for passive income
With that said here are four high-yielding ASX shares I'd buy with $5,000 today to build that $13,080 passive income stream:
- ASX 200 energy stock Woodside Energy Group Ltd (ASX: WDS) trades on a fully franked trailing yield of 14.1%
- ASX 200 bank stock Westpac Banking Corp (ASX: WBC) trades on a fully franked trailing yield of 5.3%
- ASX 200 mining stock Fortescue Metals Group Ltd (ASX: FMG) trades on a fully franked trailing yield of 8.3%
- ASX 200 auto retail share Eagers Automotive Ltd (ASX: APE) trades on a fully franked trailing yield of 5.2%
If I were to invest an equal amount in each stock, I could expect to earn an average yield (based on the trailing yield) of 8.2%.
I'd also be hoping these companies post share price gains over time.
I believe that could conservatively see my total returns come out to 12% a year.
(Fuelled by a strong run from Fortescue, the average share price gains for these four ASX 200 stocks over the past five years is considerably higher than 12%.)
I'd also be sure to reinvest those dividends to make the most of compounding.
To the maths
So, how long will it take before I can start withdrawing my passive income?
Well, working with the 8.2% dividend yield, I'd need to build my ASX 200 share portfolio up to $159,517 to withdraw $13,080 a year without touching my capital.
Starting with $5,000 today, and achieving a 12% annual total return, I'd reach that goal in 29 years.
As always, before you invest a single dollar in ASX shares be sure to do your own careful research. If you're time-poor or don't feel comfortable with that, just reach out for some expert advice.
