ASX dividend shares are a great way for Australian investors to earn a consistent passive income.
Passive income can also give investors a buffer against share market volatility. This is particularly valuable when share markets swing between peaks and troughs.
The catch is that it can be difficult to spot the ASX shares that are most reliable and can give you the passive income you're targeting.
Let's break it down, using $10,000 per year in passive income as an example.
Image source: Getty Images
What portfolio size do I need to get $10,000 in annual passive income from ASX shares?
The easy way to work out the amount of money you'd need is to divide your annual $10,000 passive income by the dividend yield of your overall portfolio.
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.
So, to receive $10,000 per year in passive income from ASX shares with a 3% dividend yield, you'd need a portfolio of around $333,000.
Then, as your dividend yield increases, the portfolio size needed to earn the same level of passive income goes down.
That means that if your portfolio has an overall dividend yield of around 4%, you'd need to invest closer to $250,000 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 $200,000.
You'd then need closer to $166,000 to earn the same income off shares with an overall 6% dividend yield.
Raise that portfolio yield to 7% or even 8%, and you would need to be closer to $143,000 or $125,000, respectively.
And so on.
These figures are based on cash dividends before any tax or franking credit benefits.
What ASX shares can I invest in to get my $10,000 annual passive income?
There is a huge range of ASX dividend shares available to buy, and their yields vary significantly.
But here are a few of my favourites to get you started.
Lower yielding ASX dividend-paying shares such as Wesfarmers Ltd (ASX: WES), Coles Group Ltd (ASX: COL) 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), retail giant Harvey Norman Holdings Ltd (ASX: HVN), or a REIT like Charter Hall Social Infrastructure REIT (ASX: CQE).
Packaging giant Amcor (ASX: AMC) yields closer to 7%, as does Bank of Queensland Ltd (ASX: BOQ).
If you want to take on more risk and go for a much higher-yielding ASX stock, my picks would be Nine Entertainment Co Holdings Ltd (ASX: NEC) or BetaShares Australian Top 20 Equities Yield Maximiser Complex ETF (ASX: YMAX). These typically yield 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 does a diversified portfolio look like?
Say you have $200,000 to invest; to earn $10,000 per year in passive income, you'd need a portfolio yield of around 5%.
But remember, you don't need to invest the whole $200,000 at once, and the dividend is the overall portfolio dividend, not exclusively ASX shares with individual dividend yields at 5%.
For example, you could split your portfolio up so that around 65% is invested into mid-range yielding ASX shares, another 20% is invested into slightly higher yielding stocks, and the remaining 15% could be invested into riskier but much higher yielding shares.
I'd also look to buy the ASX shares across multiple sectors to diversify my portfolio even further.
It's important to note that while a 5% yield from a diversified portfolio is a reasonable long-term target, it won't be achieved every year. Your passive income will likely fluctuate, depending on the company's profits and dividend decisions.
