Earning $8,000 of annual passive income from an $8,000 investment in an S&P/ASX 200 Index (ASX: XJO) dividend stock might sound a bit pie-in-the-sky.
And to get this out upfront, if you're hoping to achieve that kind of return immediately, well, then it most likely is.
Investing isn't a get-rich-quick scheme. Sure, there are a few ASX 200 shares that have more than doubled in value over the past year. But those super higher performers are the exceptions, not the rule.
So, to achieve my $8,000 a year in passive income from my initial $8,000 investment, I'm going to need a little patience. But that's okay. If I stick with it, I'll get there in due time.
Before we get into the details, there are a few other important things to remember.
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How many baskets do I need?
'Don't put all your eggs in one basket' may be cliché. But it's also excellent advice for every passive income investor.
We'll look at one ASX 200 share I believe is trading at a long-term bargain below. But a properly diversified income portfolio should contain a larger number (10 is a decent ballpark).
Ideally, these companies will operate in various sectors and across different locations. That will reduce the odds of my income taking a big, unexpected hit if any one company or sector comes under pressure.
Also, bear in mind that the dividend yields you generally see quoted are trailing yields. Future yields may be higher or lower depending on a range of company-specific and macroeconomic factors.
Okay.
Let's dig in.
Targeting $8,000 a year in passive income
The ASX 200 share I'd invest $8,000 in today to build up to an $8,000 annual passive income stream is Woodside Energy Group Ltd (ASX: WDS).
As you may be aware, Woodside shares have been under pressure over the past year. That's been partly driven by lower oil and gas prices and investor discontent over the company's climate action plan. Woodside has also been spending heavily on growth projects.
But with shares down 30% over the past year, closing on Friday at $24.29, I believe that shares bought at today's prices will earn a much larger yield (more of that handy passive income) than investors buying at potentially higher future prices.
I think the oil price is near its longer-term bottom. And Woodside's growth projects will begin to deliver revenue once they come online. Woodside expects to ship its first LNG cargo from its multi-billion-dollar Scarborough project in 2026. And first oil from its Trion project in Mexico is targeted for 2028.
While I expect the Woodside share price and dividend payouts will rise significantly over the coming years, we won't factor that into our passive income calculations.
At Friday's closing price of $24.29 a share, I could buy 329 Woodside shares for $8,000, with enough change left over for a pint.
Over the past 12 months, Woodside has paid out $1.94 a share in fully franked dividends.
That sees Woodside stock trading at a (rounded) 8.0% trailing dividend yield.
This means I could expect to earn $640 a year in passive income in year one.
Now, this is where some patience comes into play, and it's why it's always a good idea to start investing early in life.
With our conservative assumptions that Woodside shares remain at current levels over the long term with no dividend increases, the power of compounding will turn that 8.0% annual yield on our $8,000 investment into $102,611 in 32 years.
I can then withdraw $8,209 a year in passive income without drawing down on that capital.
