Many investors strive for reliable passive income. Whether it's to supplement their main income source or replace it, earning an dividend yield from ASX shares is a straightforward way to make money.
The question is, how do you work out what to invest to get the passive income you want.
It's actually more straightforward than you'd think.
For example, let's assume you want to earn $1,000 in passive income every month by investing in ASX shares.
That totals $12,000 per year in dividend payments.
The easy way to work out the investment you need is to divide your annual passive income by the dividend yield.
The tricky part is that the answer varies widely depending on the dividend yield of the ASX shares you'd be buying.
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How much you'd need depending on the ASX share's dividend yield
Here's a breakdown of how much you can expect to invest depending on the dividend yield of the shares.
The average dividend yield on the Australian share market is traditionally around 4%. These are usually blue chip companies and major heavyweights which are considered low-risk but long-growth. For example, major banks like National Australia Bank Ltd (ASX: NAB) and defensive stocks like Telstra Group Ltd (ASX: TLS).
An investor would need to invest $300,000 into shares with a 4% dividend yield in order to earn a passive income of $1,000 per month (or $12,000 per year).
If the yield is higher, at around 6%, you're looking at a $200,000 investment. These are typically companies with a stronger cash flow, which operate in more cyclical industries, which comes with additional risk. For example, ASX infrastructure shares such as APA Group (ASX: APA) or energy companies like Origin Energy Ltd (ASX: ORG).
Then there's high-yielding companies, which come with even greater risk, and are usually highly cyclical. ASX shares like intellectual property (IP) services company IPH Ltd (ASX: IPH) and media giant Nine Entertainment Co. Holdings Ltd (ASX: NEC) yield around 10%, or even more. You'd only need to invest $120,000 in order to earn $1,000 in passive income.
The catch…
While it can be tempting to buy the shares with the highest yield with the view of lowering the initial investment amount, it's not usually a wise financial decision.
As I mentioned above, the higher the yield, the higher the level of risk. Rather than fast short-term growth, your focus should always be on earning a sustainable passive income over a long period of time.
