ASX dividend shares are a popular way for investors to earn a reliable passive income.
Not only does passive income give you some more financial freedom, but it can also help create a buffer against share market volatility. This is particularly valuable right now, while markets are still choppy.
The problem is that there are so many great ASX dividend stocks out there that it's hard to pick the best performers from the bunch, and the ones which will get you the passive income that you want.
Let's break it down, using $5,000 per year as an example.
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What portfolio size do I need to get $5,000 in annual passive income from ASX shares?
The easy way to work out the portfolio size you'd need is to divide your annual $5,000 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 have in your portfolio.
For example, a portfolio with a dividend yield of around 6% only needs to be half the size of one with a dividend yield of around 3% to generate the same level of dividend income.
To receive $5,000 per year in passive income from ASX shares with a 3% dividend yield, you'd need to invest $166,700 into your portfolio.
If your portfolio has an overall dividend yield of around 4%, you'd need to invest closer to $125,000 to receive your $5,000 per year in passive income.
To get the same passive income from a 5% dividend yield you'd need to invest $100,000.
And then for a 6%, 7% or even 8% dividend yield, your portfolio size would need to be around $83,300, $71,400 or $62,500 respectively.
And so on. As your dividend yield increases, the portfolio size needed to earn the same level of passive income goes down.
These figures are based on cash dividends before any tax or franking credit benefits.
What ASX shares can I invest in to get my $5,000 annual passive income?
There is a huge range of ASX dividend shares available for superannuation investments, and their yields vary significantly.
But here are a few options to get you started.
Lower yielding ASX dividend-paying shares such as Wesfarmers Ltd (ASX: WES), Coles Group Ltd (ASX: COL), Macquarie Group Ltd (ASX: MQG), Washington H. Soul Pattinson and Co Ltd (ASX: SOL) and Commonwealth Bank of Australia (ASX: CBA) are solid and reliable shares that offer a yield of around 2% to 3%.
For a mid-range yielding ASX dividend option, I'd look at defensive assets like Telstra Group Ltd (ASX: TLS), and blue-chip majors like BHP Group Ltd (ASX: BHP), which pay a dividend of around 3% to 4%.
For a higher 5% to 6% dividend yield, I'd look at dividend-payers like National Australia Bank Ltd (ASX: NAB), ANZ Group Holdings Ltd (ASX: ANZ), Transurban Group (ASX: TCL), Woodside Energy Group Ltd (ASX: WDS), or Charter Hall Social Infrastructure REIT (ASX: CQE).
Packaging giant Amcor (ASX: AMC) yields closer to 7%, as does Bank of Queensland Ltd (ASX: BOQ) and WCM Global Growth Ltd (ASX: WQG).
If you want to take on more risk and go for a much higher-yielding ASX stock, my picks would be something like the BetaShares Australian Top 20 Equities Yield Maximiser Complex ETF (ASX: YMAX) or the Metrics Income Opportunities Trust (ASX: MOT). These typically yield around 9% or more.
But keep in mind that ASX shares carry market risk. So, diversifying across established, cash-flow-heavy dividend-payers and income ETFs is the most reliable strategy.
What could a diversified portfolio look like?
Say you have $100,000 to invest, you'd need a portfolio yield around 5%.
But remember, you don't need to invest the whole $100,000 only into ASX shares with individual dividend yields at 5%. By combining a few options, you can still have an overall portfolio yield around that level.
I'd opt for a portfolio which looks something like this:
I'd invest around 40% of my portfolio (around $40,000) into ASX shares which have a 4.5% dividend yield.
Then I'd invest another 25% (around $25,000) into ASX shares with a 5% dividend yield.
I'd also invest around 20% of the portfolio ($20,000) into ASX shares with a 5.5% dividend yield.
And then I'd allocate a percentage, around 15% (around $15,000) to a higher dividend yield around 6%.
I'd also look to buy ASX shares across multiple sectors to diversify my portfolio even further, such as banks, infrastructure, telecoms and REITs.
It's important to note, however, that while a 5% yield from a diversified portfolio is a reasonable long-term target, it won't be achieved every year. Some years you may receive more, some less, depending on company profits and dividend decisions.
It's also worth mentioning that you don't need to invest the whole $100,000 at once, it can be built up over time.
