One of the best features of buying Australian shares is the ASX dividend income they can provide. We can unlock $1,000, $10,000, or even $100,000 of annual passive income through shares.
Once we get the financial ball rolling, compounding can help grow the passive income cash flow into a larger figure.
That first $1,000 of annual ASX dividend income is very rewarding, in my opinion. I'm seeing the benefits of that myself from my own portfolio.
Our work earnings will be a specific amount each year, so it's pleasing to receive additional money that we can use for spending, saving, or investing.
If I were starting again with my portfolio from $0, I'd do the following steps.
Image source: Getty Images
Gather cash
It takes money to make money with shares – to own shares, we need money to invest in them.
Everyone's finances are different. Some may have thousands of dollars ready to invest now, while others may need to start actively putting some money aside each month to invest in the share market. That may require some households to consciously work/earn a bit more and spend a bit less to create the spare money needed to invest.
While saving the cash towards investing, I'd put that money in a high interest savings account so it's earning money while waiting to be invested.
Start investing in ASX dividend shares
I'd then pick a low-cost share brokerage provider to start investing (around $1,000) through. It's a great idea to choose a good value broker because we don't want to incur unnecessary costs.
Which businesses would be a good place to start investing? If the goal is ASX dividend income, I'd choose passive income stocks that have a reputation for growing their payouts and underlying value over time. We want to utilise the power of compounding so the shares deliver growth themselves as we invest more and more over time.
I think businesses like Washington H. Soul Pattinson and Co. Ltd (ASX: SOL), MFF Capital Investments Ltd (ASX: MFF), Hearts and Minds Investments Ltd (ASX: HM1), and Wesfarmers Ltd (ASX: WES) have a reputation for growing dividends and value over time.
If investors want a pleasing level of passive income from their investments, I'd recommend businesses with a solid starting dividend yield, like the ones above.
Snowball
We can't expect to start earning $1,000 of annual ASX dividend income straight away. But, it can quickly build.
Investing $1,000 into a business with a 4% dividend yield would create $40 of dividends. If that business increased its payout by 10% after a year, we'd get $44 of annual dividends. Another increase would be $48.40 in annual income. And so on.
It's important to keep adding money to our portfolio, too. Investing another $1,000 (with a 4% yield) would result in an additional $40 in annual income.
Through a combination of investing and dividend growth, Australians can build towards $1,000. With a 4% dividend yield, we'd need to reach a portfolio value of $25,000.
If someone invests $500 per month and it returns an average of 10% per year, it would reach $25,000 in less than five years. Continuing that regular investing could help the passive income become much larger in the subsequent years.
