Owning ASX dividend shares can be very rewarding because of the wonderful cash flow they can deliver. With a large enough portfolio, someone can quit their job and just live off the dividend income.
Dividends are not like interest from a bank account. I think dividends are much better – the payments can grow and often the payouts from Australian companies come fully franked, which is an added boost to the after-tax yield.
You've probably heard of some of the biggest dividend-paying companies on the ASX, including BHP Group Ltd (ASX: BHP), Commonwealth Bank of Australia (ASX: CBA), Telstra Group Ltd (ASX: TLS) and National Australia Bank Ltd (ASX: NAB).
There are plenty of ASX dividend shares to choose from, and I'll mention some of my favourites at the end of this article.
But first, let's consider how much someone would need to live off dividend income.
Image source: Getty Images
Dividend income target
Everyone has different income levels, lives in different places and has different spending requirements.
To come to an annual target, I'll use two different references.
First, the AFSA Retirement Standard tells retirees how much they might spend when they retire, whether they're a couple or a single person, and whether they need a comfortable lifestyle or a modest lifestyle.
For a comfortable lifestyle for 65 to 84-year-olds, AFSA has calculated that a couple would require $73,337 of annual spending, and a single person would require $52,085 of annual spending. However, those figures assume that retirees own their own homes outright, so most people would require more income than that.
We also need to make sure that we have accounted for tax. Income made in our own name is taxable, and therefore we need to earn more – spending comes from our post-tax earnings, rather than pre-tax.
Full-time earnings data from the Australian Bureau of Statistics (ABS) could be a better gauge. According to the latest ABS data, full-time adult average weekly ordinary time earnings is around $100,000.
I think $100,000 is a nice, round dividend income target. After all the inflation in recent years, it's a sizeable target.
How much cash is needed?
Different investments come with different yields, but I'd suggest a 5% yield (including franking credits) is a sustainable yield.
If someone relies solely on dividend income, with no other sources of income, an investor would need a portfolio of $2 million to make $100,000 of passive income at a 5% dividend yield. Other sources of income, such as part-time work, could significantly reduce the amount of cash needed.
Of course, we don't necessarily need $2 million in our bank account to reach that target. Investment returns and compounding can help us grow to that amount over time.
Which ASX shares I'd buy
I'd buy a few different investments to help grow my portfolio for the long term (with dividend income and growth in mind), including Washington H. Soul Pattinson and Co. Ltd (ASX: SOL), Brickworks Limited (ASX: BKW), Wesfarmers Ltd (ASX: WES), Telstra, and Collins Foods Ltd (ASX: CKF).
I'll also point out that exchange-traded funds (ETFs) can be a great way to grow wealth over the long term, including ones like VanEck Morningstar Wide Moat ETF (ASX: MOAT), VanEck MSCI International Quality ETF (ASX: QUAL), and Betashares Global Quality Leaders ETF (ASX: QLTY).
