ASX dividend shares are a great way for investors to build financial security, take advantage of compounding, and create an extra passive income stream.
A common misconception is that investors need to invest millions of dollars (or more) to make it worth it.
The reality is that you could earn a good passive income off a portfolio of around $100,000.
But what could that passive income actually look like?
Let's break it down.
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How much could I earn off a $100,000 ASX share portfolio?
The easiest way to calculate your passive income is by multiplying your total portfolio value by your dividend yield.
The tricky part is that the answer varies widely depending on the dividend yield of your portfolio.
For example, $100,000 x 3% = $3,000 per year in dividend payments.
But if your portfolio has a dividend yield of around 6%, your passive income will be double the size. That's because $100,000 x 6% = $6,000 per year in dividend payments.
And so on. As your dividend yield increases, the passive income you can earn from your $100,000 portfolio also increases.
These figures are based on cash dividends before any tax or franking credit benefits.
Of course, this type of money isn't going to become a primary income stream, but it'll certainly help create an extra buffer.
Which ASX shares could earn me $3,000 per year in dividends?
To earn an annual passive income of around $3,000, your portfolio will need to yield around 3%.
A 3% dividend yield is very achievable, and there is a wide range of high-quality ASX dividend shares that pay out around that level.
For example, major blue chips like BHP Group Ltd (ASX: BHP) and Commonwealth Bank of Australia (ASX: CBA) pay around the 3% mark. As do long-standing ASX dividend players like Washington H. Soul Pattinson and Co Ltd (ASX: SOL), ASX healthcare giant CSL Ltd (ASX: CSL), and Coles Group Ltd (ASX: COL).
What ASX shares could help me earn around $6,000 per year in dividend payments?
To earn an annual passive income of around $6,000, your portfolio will need to yield around 6%.
This is a little higher than the average across the index, but there are still plenty of options available.
For example, long-standing ASX dividend payer APA Group Ltd (ASX: APA) pays around 6%. Metcash Ltd (ASX: MTS) also pays around a 6% yield, as does energy provider AGL Energy Ltd (ASX: AGL).
What about if I wanted to earn $10,000 per year in dividends? Is that possible?
Technically, yes, although your portfolio would need to average a dividend yield of around 10%.
There are options around this level, but they generally come with higher risk.
Some good high-yielding ASX shares are IPH Ltd (ASX: IPH) and non-bank lender Liberty Financial Group Ltd (ASX: LFG). Meanwhile, GQG Partners Inc (ASX: GQG) yields even higher, at around 16%.
Of course, it's important to note that, ideally, you want to build a portfolio comprising a mix of different yielding shares for diversification, rather than a portfolio of just one stock.
