How I'd invest $20K in ASX shares to target $1,000 in annual passive income

Sometimes it takes money to make money. Here are some contenders on making strong passive income.

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Key points

  • IGA supplier Metcash has a grossed-up dividend yield of 7.9%
  • Shaver Shop just reported its HY23 result, which included a rise in the dividend – it now has a grossed-up dividend yield of over 12%
  • Pacific Current has a growing portfolio of investments in fund managers and a grossed-up dividend yield of 7.5% 

The ASX share market is a very fruitful place to find ideas to grow annual passive income. To achieve an annual income of $1,000 from $20,000, I'd need an average dividend yield of at least 5%.

There aren't many places where we can find a yield of 5%, as well as the potential for capital growth.

ASX dividend shares can provide a combination of dividend income and share price returns.

With that in mind, these are some of the higher-yielding ASX dividend shares that I'd use and split $20,000 between.

Metcash Limited (ASX: MTS)

Created with Highcharts 11.4.3Metcash PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.com.au

Metcash is a diversified business that supplies food to IGAs and liquor to retailers like IGA Liquor, Bottle-O, Cellarbrations and Porters Liquor around the country. The company also has a hardware division, which owns the brands Mitre 10, Home Timber & Hardware and Total Tools.

The company is targeting a dividend payout ratio of 70% of underlying net profit after tax (NPAT). This results in the company paying a healthy dividend yield each result.

I think the sectors in which it operates are fairly defensive and that the overall business can benefit from factors like investments in productivity, with population growth being a useful tailwind.

The last two dividends amount to 22.5 cents per share, which is a grossed-up dividend yield of 7.9%.

Shaver Shop Group Ltd (ASX: SSG)

Created with Highcharts 11.4.3Shaver Shop Group PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.com.au

Shaver Shop is one of the smaller ASX retail shares. It sells a variety of advanced hair removal products, as well as beauty and oral care.

Despite all of the impacts on the economy over the past year, the business just reported that total sales increased by 3.8% to $131.9 million, while the NPAT went up 4.5% to $13.7 million, and the interim dividend was increased by 4.4% to 4.7 cents per share.

The business achieved earnings per share (EPS) of 10.8 cents (up from 10.6 cents per share in the first half of FY22), so the dividend payout ratio is only 44%. This was the sixth consecutive increase in the interim dividend since its initial public offering (IPO) in 2016.

With the gross profit margin higher in the first seven weeks of FY23 second half, this has helped gross profit in dollar terms, despite total sales being down 2.1% year over year.

The latest two dividends from the ASX dividend share amount to 10.2 cents, which equates to a grossed-up dividend yield of 12.1%.

Pacific Current Group Ltd (ASX: PAC)

Created with Highcharts 11.4.3Pacific Current Group PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.com.au

Pacific Current describes itself as "a global multi-boutique asset management business" that partners with "exceptional investment managers". In other words, it invests in fund managers, helps them grow and reaps the rewards of that.

The different asset managers and investment styles have created a portfolio of pleasing earning generators for the ASX dividend share.

Consistent earnings growth is not guaranteed, but the company's underlying funds under management (FUM) continue to grow.

In the three months to 31 December 2022, the business saw its portfolio FUM rise from A$171.2 billion to A$175.1 billion.

The business has increased its annual dividend each year since 2018. The last 12 months of dividends amount to a grossed-up dividend yield of 7.5%.

Foolish takeaway

While I was aiming for an average dividend yield of 5%, the above three ASX dividend shares have an average yield of just over 9%. That means $20,000 invested evenly between them would generate $1,833 of annual passive dividend income. They could be mixed with lower-yielding names, but still good options like Telstra Group Ltd (ASX: TLS).

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has positions in and has recommended Telstra Group. The Motley Fool Australia has recommended Metcash. 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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