Is it really possible to earn $10,000 a year in passive income by investing $10,000 in S&P/ASX 200 Index (ASX: XJO) shares today?
You bet it is.
Though, unless you're aware of an ASX stock with a 100% dividend yield, you're not going to reach this goal in the first year.
(If you are aware of a stock sustainably yielding 100% a year, drop me an email!)
Now, $10,000 a year in extra passive income might not be completely life changing. But, if you're like me, it sure would come in handy in those golden years.
Here's how I'd go about it reaching that goal.
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Growing your ASX 200 portfolio income basket
First, we need to invest our $10,000 in a diversified basket of ASX 200 shares, with an eye on those with higher growth potential.
It's fine if these companies pay dividends. But it's also fine if they don't. We're building up to being able to draw down $10,000 a year in passive income, but until then we'll be reinvesting any dividends that do come in.
So, what kind of annual returns can we expect?
Well, the S&P/ASX 200 Gross Total Return Index (ASX: XJT), which includes all cash dividends reinvested on the ex-dividend date, is up 66% over the past six years. That equates to a compound annual growth rate (CAGR) of 8.7%.
But I think we can do a bit better than the index average with some thorough research and perhaps some expert investment advice. With that in mind, I believe a 10% CAGR is achievable.
Tapping into the power of compounding, that will see our $10,000 ASX passive income portfolio investment grow to $109,141 in 24 years.
Of course, we can reach that goal a lot faster if we invest a bit extra every few months when we can afford to. But sticking with just the single $10,000 investment today, we'll still get there in good time.
Tapping that portfolio for $10,000 a year in passive income
Now that we've built a suitable ASX 200 share portfolio, it's time to turn to some higher yielding ASX 200 dividend stocks for that $10,000 annual passive income.
If we were making that investment today, I'd recommend considering a stock like New Hope Corp Ltd (ASX: NHC).
The ASX 200 coal miner has paid out a total of 41 cents a share in fully franked dividends over the past year. At Friday's closing price that sees the stock trading on a fully franked trailing dividend yield of 11.0%.
I'd also look into Super Retail Group Ltd (ASX: SUL) for passive income, whose brands include Supercheap Auto, Rebel, BCF and Macpac.
Super Retail has paid out a total of $1.19 a share in fully franked dividends over the past year. At Friday's closing price, the ASX 200 retail stock trades on a fully franked trailing dividend yield of 8.3%.
And finally there's Fortescue Metals Group Ltd (ASX: FMG)
The ASX 200 mining giant has paid out a total of $1.39 in fully franked dividends over the past year. At Friday's closing price, Fortescue trades on a fully franked trailing dividend yield of 8.9%.
If we were to invest a similar amount in each of these three ASX 200 dividend stocks, that would see us earning an average, fully franked dividend yield of 9.4% (based on today's trailing yields).
Having patiently grown our initial $10,000 investment into $109,141, this will see us earning $10,259 a year in passive income.
