High-yield ASX dividend shares can be a great source of passive income. Depending on the dividend yield, investors could unlock hundreds of dollars of dividends with a total investment of $8,000.
A dividend yield is sort of like the interest rate we receive from a bank savings account. If we put $8,000 into a savings account with a 5% interest rate, it would create annual income of $400.
So, I'd suggest that if investors are investing for a good level of income, a portfolio of high-yield ASX dividend shares should aim for a portfolio yield of at least what savings accounts are providing – 5%, at the current RBA interest rate.
Dividend growth
While it's not a rule, I'd generally expect that the lower the dividend yield a business has, the more it's likely to grow its payouts in the future. That's because the business is probably priced higher to reflect growth and the dividend payout ratio could be lower (which means a lower yield but more reinvestment for growth).
With a 5% dividend yield, I'd hope to see solid growth. So while the first year could show $400 of annual income, the businesses could grow their payout by, say, 10%, and year two's annual income could rise to $440.
The sorts of businesses I'd be looking at for this mid-range dividend yield include Washington H. Soul Pattinson and Co. Ltd (ASX: SOL), Centuria Industrial REIT (ASX: CIP), Dexus Industria REIT (ASX: DXI), and MFF Capital Investments Ltd (ASX: MFF).
Higher yield
One of the great things about the ASX is that we can find high-yield ASX dividend shares with various levels of payouts.
If we built a portfolio with an average dividend yield of, say, 7%, investing $8,000 would create an annual dividend income of $560. That's an impressive amount of income, in my view, considering the portfolio could also achieve capital growth in the long term.
Some of the businesses with a higher yield that I'd be happy to own for larger dividends include Telstra Group Ltd (ASX: TLS), GQG Partners Inc (ASX: GQG), Charter Hall Long WALE REIT (ASX: CLW), and APA Group (ASX: APA).
Huge yields
The biggest dividend yields can come with higher risks than some of the businesses with smaller yields.
Large dividends can be cut. Even if there are no reductions, it may suggest that the business is retaining hardly any profit to reinvest for growth.
There aren't many high-yield ASX dividend shares that I'd feel comfortable investing in. I'd only want to choose investments that I think look undervalued.
If a dividend portfolio had a 10% dividend yield, a $8,000 investment could deliver $800 of annual dividend income.
At the moment, I'd be thinking about some stocks like Centuria Office REIT (ASX: COF) and Shaver Shop Group Ltd (ASX: SSG).
Overall, I'm aiming for yields closer to 5% than 10% for my portfolio, but each yield level has positives and negatives.
