If someone told me that I could buy $20,000 worth of ASX shares and get $5,000 back in annual passive dividend income, I would probably channel Darryl Kerrigan and 'tell 'em they're dreaming'.
After all, $5,000 from a $20,000 investment would necessitate obtaining a starting dividend yield of 25%, which, as any serious dividend investor will tell you, is fanciful.
Yet I think it is possible to get that kind of passive income yield from an ASX dividend share. You just need the right stock, and the addition of a crucial ingredient – time.
Let's start with the right stock. As I've argued many times before, only the best ASX dividend stocks have the financial capacity to deliver an ever-rising stream of passive income. Even many of the ASX's best blue-chip stocks tend to have dividends that fall into a cyclical pattern.
But some income stocks can deliver a dividend that rises by more than the rate of inflation each year.
One of my favourites is Washington H. Soul Pattinson and Co Ltd (ASX: SOL).
Soul Patts has the distinction of being the only ASX share that has increased its annual dividend every single year for 28 years running. What's even better is that the passive income from this ASX investing house has increased by an average compounded annual growth rate of 11.9% over the past five years (FY21 to FY25).
Now, Soul Patts currently trades on a trailing dividend yield of 2.57% (at the time of writing). That means a $20,000 investment right now would come with a reasonable expectation of about $514 in annual passive income. That's a long way from $5,000.
Image source: Getty Images
A 25% yield from an ASX passive income stock?
But let's add some time into that equation. If we assume (and we can never just assume in the world of investing) that Soul Patts will continue to grow its annual dividends by 11.9% per annum going forward, we can see how a 25% yield on cost is possible.
After one year, that $514 in annual passive income would grow to just over $575. When six years have passed, it would hit four figures. After 14 years, we'd be halfway at just over $2,500 in annual passive dividend income. By the time 21 years have passed, our initial investment would be yielding $5,550 in annual dividends.
Of course, 21 years is a long time to wait. But this exercise shows how the power of compounding can get one to a 25% yield on cost. And this is assuming no additional cash investments, too. If our investor put some extra dollars into their Soul Patts position each year, as well as reinvesting those dividends back into more shares, they could reduce that 21-year time frame significantly.
