If I had to invest $10,000 to generate passive income, I'd choose ASX dividend shares because of the dividend yield.
I'm not about to suggest that Aussies go out there and try to find a 15% dividend yield.
But, if we invest right, investors could end up generating a 15% yield on their initial investment. It will take some patience, though.
It's important to remember that some large dividend yields may not stand the test of time. A dividend cut may be on the cards for businesses that seem to have huge yields because investors have pushed the share price lower, betting that earnings and the payout are going to drop in the near future.
I think there are two ways where we can unlock a large dividend yield of 15% (or more). Let's look at how.
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Big starting dividend yield
I wouldn't expect any business to offer a sustainable starting dividend yield of 15%. But, there are some with yields of between 9% to 11% where I expect the business can maintain and slowly grow its payout in the coming years.
While it might take a while to reach 15%, I think this sort of business could deliver a big dividend yield at the start and become even larger over time.
There are some names that come to mind for large payouts such as WAM Microcap Ltd (ASX: WMI), Hearts and Minds Investments Ltd (ASX: HM1) and Shaver Shop Group Ltd (ASX: SSG).
With those sorts of dividend yields, if someone invested $10,000 then they could unlock $1,000 of annual income straight away.
Dividend growth
While huge yields may appeal to some investors, it could be a better call to look at businesses that are growing their payout at a faster pace. That could lead to stronger total shareholder returns (TSR) and eventually the yield could surpass what a higher-yielding business offers.
For example, if a 10% yielding business grows its payout by 2% per year, it becomes 15% yield in around 20 years. A business with a 5% dividend yield that's growing the payout at 10% per year becomes a 15% dividend yield on the initial investment after 12 years.
Of course, we can't know for sure what businesses are going to do with their payouts over the next decade or more.
What sort of businesses have a solid starting payout today and could deliver strong dividend growth over the longer-term?
I'd look at apparel retailer Universal Store Holdings Ltd (ASX: UNI), jewellery retailer Lovisa Holdings Ltd (ASX: LOV), investments business Pinnacle Investment Management Group Ltd (ASX: PNI) and ethical fund manager Australian Ethical Investment Ltd (ASX: AEF).
Either way, I think there are some very exciting investments out there for investors looking for a lot of passive income.
