How to generate $50,000 of passive income with ASX dividend shares

Investments in Altium Limited (ASX:ALU) and Australia and New Zealand Banking Group (ASX:ANZ) could have helped you generate a passive income of $50,000 this year…

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Would you like a passive income of $50,000 per year? I know I would!

The good news is that with a combination of time, patience, and dividend shares, this is a real possibility.

How can you earn $50,000 a year with ASX dividend shares?

If you are already sitting on a big nest egg, then you're already halfway there.

With Australia and New Zealand Banking Group (ASX: ANZ) forecast to pay a partially franked dividend of ~$1.57 per share in FY 2020, its shares currently offer a generous dividend yield of 6.3%.

Based on that yield, an investor would need to buy ~$794,000 worth of ANZ's shares to generate a passive income of $50,000 per year.

How else can you achieve this?

Not everyone is fortunate enough to have those sorts of funds sitting in their bank account. So, this method is clearly not an option for everyone. However, if you have time on your side, then you can still achieve this if you invest wisely.

I believe the most important thing to do is to look for companies that have strong long-term growth potential and pay dividends, or at least intend to pay dividends in the near future.

Another important thing to note, is that it doesn't matter if the company's dividend yield is small at present.

The reason for this, is because the most important focus eventually will be the yield on cost. This is the dividend yield on the price that the investor paid for the shares originally.

I think a great example of why this is important is Altium Limited (ASX: ALU).

The printed circuit board design software company is not regarded as a dividend share. Yet, if you invested in its shares 10 years ago, you would be counting down the days to the dividend pay date every six months.

A decade ago you could have bought Altium's shares for 28 cents. This month the company released its half year results and declared an interim dividend of 20 cents per share. Combined with its final dividend from FY 2019 of 18 cents per share, Altium will soon have paid a total of 38 cents per share over a 12 month period.

As you might have noticed, Altium's dividends are more than the price you would have paid for its shares 10 years ago. In fact, this means they have a staggering yield on cost of 136%. 

Based on this, it would have taken a more affordable $37,000 investment in 2010 to generate $50,000 in dividends in 2020. And let's not forget the immense capital returns you would have generated along the way.

What about the future?

But how can you do this in the future? I think Altium remains a great option due to its strong long term growth potential and growing dividends.

In addition to Altium, it is worth noting that the rapidly growing A2 Milk Company Ltd (ASX: A2M) is sitting on a pile of cash. I wouldn't be surprised if it started to return funds to shareholders in the near future.

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of A2 Milk and Altium. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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