There are multiple ways to generate an income, such as job earnings, dividends from (Australian) stocks, rental income, savings accounts, bond interest and so on.
For most people, their job is the primary source of income. Earning $50,000 from work may not sound like too much, but it's equivalent to having a $1 million portfolio with a 5% yield.
However, work earnings are limited to what we can earn with our time.
Dividend payments can accumulate and grow over time. Plus, we don't need to work for those payments; that's why it's called passive income. You can think of passive income as a second worker making money for our bank account.
But what sort of ASX dividend shares are the right ones to go for?
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Regular pay rises
There are some businesses that have a high dividend yield, such as Shaver Shop Group Ltd (ASX: SSG). But that may not be the most effective dividend pick for working Australians.
Dividends are taxed alongside work earnings on tax returns. Receiving large dividends could mean losing a sizeable chunk of the return each year to the tax office. Paying taxes is not necessarily a bad thing, but it does reduce the net return.
For my own portfolio, I prefer investing in Australian stocks that generally provide regular annual dividend growth.
I focus on names I believe will continue growing their payments in the years to come. Considering my passive dividend income as a worker generating money for me, I want to choose names that I believe have a high chance of delivering regular pay increases.
Dividend growth is helpful in increasing our cash flow to supplement job earnings, it can provide inflation protection, and it's a good sign that the business is growing its profits and its underlying value over time.
In other words, ASX dividend shares that are hiking the dividend are likely to deliver solid total returns, not just pleasing dividend yields.
Which ASX dividend shares are good options?
I prefer to invest in businesses that have a proven track record of dividend payments and have demonstrated a commitment to increasing those payouts for investors.
There are a few in my portfolio (and a couple that aren't) that I'll highlight as ideas, such as:
- Investment conglomerate Washington H. Soul Pattinson and Co. Ltd (ASX: SOL)
- Energy infrastructure giant APA Group (ASX: APA)
- Water entitlement owner Duxton Water Ltd (ASX: D2O)
- Telco Telstra Group Ltd (ASX: TLS)
- Bunnings and Kmart owner Wesfarmers Ltd (ASX: WES)
- Listed investment companies (LICs) MFF Capital Investments Ltd (ASX: MFF), Future Generation Australia Ltd (ASX: FGX), L1 Long Short Fund Ltd (ASX: LSF) and Hearts and Minds Investments Ltd (ASX: HM1)
I believe a portfolio comprising the above names, along with a few others, could yield a pleasing mix of diversification and dividends. How great would it be to be able to receive $10,000 (or $100,000) of annual dividend income from Australian stocks to boost our finances?
Investing $1,000 today in an ASX dividend share could unlock $50 of annual income. If that dividend grew by 10% per year, it'd become $55 after year one, $60.50 after year two and so on. Compounding is a very powerful tool, particularly when we regularly invest in our portfolios.
