I'm targeting $5,000 a year in retirement from $20,000 in this passive income gem!

I'm hoping to get a 25% yield from this stock one day.

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Key points
  • Investment in ASX Dividend Shares for Early Retirement: Let's discuss an investor's strategy to use passive income from ASX dividend shares to potentially retire earlier than the traditional age.
  • Washington H. Soul Pattinson and Co Ltd: This company is highlighted for its robust track record of annual dividend increases since 1998 and market-beating returns, making it a preferred choice for the investor.
  • Long-Term Passive Income Growth Potential: By assuming a continued annual dividend increase of 10.5%, the investor illustrates how an initial $20,000 could yield approximately $5,000 in annual dividends over 25 years, equating to a 25% yield-on-cost.

I'm sad to say (but happy) that I'm a couple of decades away from retirement. Or at least the traditional retirement age. One of the reasons I invest in passive income-generating ASX dividend shares is to try to bring that retirement age forward as much as possible.

Thanks to the magic of compound interest, I have faith that by investing in wealth-creating ASX shares today, I can set myself up to enjoy a steady stream of passive income down the road.

One of the ASX shares that I have placed this faith in most enthusiastically is Washington H. Soul Pattinson and Co Ltd (ASX: SOL).

Soul Patts is an investment house that has been listed on the ASX for more than a century. Over this period, it has built a reputation as a prudent and savvy allocator of capital. So much so that Soul Patts has managed to deliver market-beating returns for the past two decades.

Its portfolio, which consists of a diversified range of assets such as ASX shares, private credit, and property, has also enabled this ASX share to build the ASX's most impressive dividend streak. No exaggeration.

Soul Patts has delivered an annual dividend increase every year since 1998. That's 27 years and counting of annual shareholder passive income pay rises.

Since 1998, Soul Patts has grown these annual dividends at a compounded rate of 10.5% per annum, excluding special dividends. Over the past five years (2021-2025), that rate has hit 13.5%.

This means an investor who puts $20,000 into Soul Patts shares today could enjoy $5,000 over their retirement.

australian bank notes hanging from tree branches like leaves

Image source: Getty Images

How to get a 25% passive income yield

You might be wondering how that's possible, given this passive income stock only trades on a dividend yield of 2.75% today. That would see an investor who puts $20,000 get just $550 in dividends per year if that holds. That comes from the approximate 534 shares we would get from $20,000 at current pricing, as well as the $1.03 in annual dividends per share the company doled out in 2025.

Well, all we need is time and compounding.

Let's go out on a limb and assume that Soul Patts will continue to increase its annual dividend by 10.5% per annum for the foreseeable future. Even if we don't reinvest our dividends or buy any more stock, it would take nine years for our annual stream of passive income to double to $1,000. Eight years after that, it would hit $2,000, and $4,000 after another seven. After 25 years, we would be getting about $5,000 in annual dividend income from our $20,000 investment – representing a yield-on-cost of 25%.

Now, 25 years is a very long time, of course. But the rate of return is more than enough to help an investor retire early if they spend their working years putting as much cash as possible into wealth-generating stocks like Soul Patts. And these days, most of us can thankfully expect to spend at least 25 years in retirement anyway.

Motley Fool contributor Sebastian Bowen has positions in Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia has positions in and has recommended Washington H. Soul Pattinson and Company Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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