ASX stocks can be a great source of investment returns to grow our wealth. Some investments could be a great choice for capital growth, while others are compelling for passive income.
There's only so much we can earn from our day job. After that, other forms of income are needed to boost the amount of money coming through the door.
When I think about which investment asset classes don't take much of our time as the portfolio grows in size, and can provide good passive income, I believe ASX stocks are the best option.
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Great passive income
Online share brokerage has made it incredibly easy to invest in ASX-listed investments.
Once someone has invested in an ASX share, they don't need to do anything to run it or make decisions about whether to fix something or pay for a new item. The company's management does that for shareholders. We can just let the investment do its thing.
Assuming we've chosen an investment that pays passive income, the dividends will roll into the bank account with zero effort on our part.
Another great positive to ASX stocks for passive income is the dividend yields on offer.
Term deposits are offering a (temporary?) high interest rate right now, but there's no organic growth. Certain ASX dividend stocks can provide a better dividend yield than a term deposit rate and/or very good dividend growth.
A river of dividends
If creating passive income is the goal, I'd suggest investing in businesses that have a track record of growing the payout for investors, while also having a pleasing dividend yield to start with. As time goes by, the river flow of payments will become stronger.
That's why I'm attracted to names like Washington H. Soul Pattinson and Co Ltd (ASX: SOL), L1 Long Short Fund Ltd (ASX: LSF), Wesfarmers Ltd (ASX: WES), Telstra Group Ltd (ASX: TLS), Future Generation Australia Ltd (ASX: FGX), Future Generation Global Ltd (ASX: FGG) and Hearts and Minds Investments Ltd (ASX: HM1).
If someone invests $1,000 in an ASX dividend stock, such as L1 Long Short Fund, with a grossed-up 5% dividend yield (including franking credits), it would unlock $50 of annual income.
Imagine it then hikes the dividend by 10% in the following year. That's $55 of annual passive income.
Then another 10% increase would make it $60.50 of income.
And so on.
No dividend growth is guaranteed of course, but some businesses are more likely to deliver good dividend growth than others.
Imagine investing $1,000 multiple times. That would create hundreds of dollars of income that an Australian could use to boost their financial picture.
I know this is an effective method because I'm already utilising it and benefiting from it.
My household is getting the benefit of annual dividends that can now, after plenty of years of saving and investing, be measured in thousands rather than hundreds of dollars. Plus, they're delivering a pleasing mixture of long-term dividend growth and capital growth – exactly what I'm after!
