Every Aussie investor dreams of making an easy and consistent passive income.
And ASX dividend shares are a fantastic way to get you there.
The problem is that it can be difficult to work out exactly which shares to buy and how much to invest to get the passive income you want.
To help, here's a rundown of how to earn a passive income through ASX dividend shares, using $12,000 per year in passive income as an example.
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What portfolio size do I need to get $12,000 per year in passive income from ASX shares?
To calculate the portfolio size you'd need to earn $12,000 per year in passive income, you'd need to divide your annual passive income figure by the dividend yield of your overall portfolio.
So in this case, for example, $12,000 divided by a dividend yield of 3% is $400,000. This $400,000 figure is the portfolio size you'd need to earn this level of passive income each year.
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.
How much do I need if my portfolio yields 4% to 8%?
We've already calculated (above) the balance you'd need to earn $12,000 off a 3% yielding portfolio.
To earn the same passive income off a 4% yielding portfolio, you'd need around $300,000.
Then, to earn $12,000 from a 5% yielding portfolio, it would need to be closer to $240,000.
If your portfolio has an overall dividend yield of around 6%, you'd need to invest closer to $200,000 to receive your $12,000 per year in passive income.
Your portfolio would only need to be around $171,500 to earn $12,000 if it had an overall yield of 7%.
Portfolios yielding 8% would need to be around $150,000 to earn the same $12,000 per year.
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.
Can't I just invest in the highest-yielding stocks so I don't need to put up as much money up front?
Technically, yes, but it would be a bad investment decision.
Generally, the higher yielding the ASX shares, the more risk they carry.
Instead, you'll want to focus on creating a diversified portfolio. For example, you could split your portfolio so that around 70% is invested in mid-range yielding ASX shares, and the remaining 30% is invested in high-yield stocks or riskier shares.
I'd also look to buy ASX shares across multiple sectors to further diversify my portfolio.
It's important to note that your passive income will likely fluctuate with the company's profits and dividend decisions.
Give me some examples of passive-income earning ASX shares that yield around 3% to 6%
There is a huge range of ASX dividend shares available to buy, but here are a few of my favourites, currently yielding between 3% and 6%.
Investment banking business Macquarie Group Ltd (ASX: MQG) pays a dividend yield of around 2.7%.
Meanwhile, mining giant Rio Tinto Ltd (ASX: RIO) pays its shareholders a yield of around 3.6%, and Brambles Ltd (ASX: BXB) yields a little lower at around 3.4%.
QBE Insurance Group Ltd (ASX: QBE) pays a yield around 4.4%, at the time of writing. ANZ Group Holdings Ltd (ASX: ANZ) yields close to 4.6%.
Woodside Energy Group Ltd (ASX: WDS) pays around a 5.4% dividend yield to shareholders. Meanwhile, packaging giant Amcor Ltd (ASX: AMC) pays closer to 6%.
… and some high-yield options around 7% or more
For higher yields, real estate investment trusts (REITs) are a great option because they still offer diversity across a range of assets or shares. Charter Hall Long WALE REIT (ASX: CLW) yields around 6.8% at the time of writing.
Elsewhere, Wam Leaders (ASX: WLE) yields just shy of 7%, and Lendlease Group Ltd (ASX: LLC) yields around 7.8%.
