No passive income at 40? I'd buy ASX 200 shares for big cash dividends

You can still build big passive income in your 40s using ASX dividend shares.

A couple sits in their lounge room with a large piggy bank on the coffee table. They smile while the male partner feeds some money into the slot while the female partner looks on with an iPad style device in her hands as though they are budgeting.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Key points

  • Most Australians don't have a second income stream in place by the time they are 40
  • ASX dividend shares are a great place to start rectifying that lack of passive income
  • I would use a mixture of high-yielding dividend shares, and dividend growth shares to quickly build up some divine cash flow

Many Australians reach the age of 40 without a secondary source of passive income. That's unfortunate because 40 is probably the age where a second income stream would start becoming very useful to the average Aussie.

Luckily, it's not too late. Someone at 40 probably has a good 25 years left in the workforce that they can use to get a second income rolling, using ASX 200 shares for big cash dividends.

When you invest in a dividend share, you are entitled to whatever dividend payments that share doles out. Most ASX dividend shares pay out a dividend every six months. The more shares you buy, the more cash you can receive. If you invest in quality dividend shares for long enough, ideally reinvesting dividends along the way as well, that cash flow could help replace the income you get from your salary.

Before you get started on this passive income journey, you'll want to make sure your own financial house is in good order. So if you have debt (credit cards, personal loans or car loans, not mortgages), you'll need to pay that off first before investing in shares. You should also work towards saving more than you spend every fortnight. That way, you are in a position to regularly add funds to your investment portfolio.

But if you've done all that, then it's time to find some ASX 200 shares for big cash dividends.

Where to look for big cash dividends on the ASX 200

If I was investing for a second income, I would look to use a mixture of high-yielding ASX dividend shares, as well as shares that have shown an ability to grow their dividends consistently over time.

On the former, the big banks and the big miners are a great place to start. BHP Group Ltd (ASX: BHP) is the largest share on the ASX. It has been funding record dividend payments over the past few years, and today has a trailing dividend yield of almost 9%. BHP's dividends are cyclical, but when times are good in the commodity prices space, there is arguably a good chance that this will be reflected in BHP's payouts.

Banks are also looking tempting from an income perspective right now. The big four banks, with the exception of Commonwealth Bank of Australia (ASX: CBA) all offer fully franked yields above 6% today. If the banks keep up their dividend payments, these shares could give your passive income stream a strong kick-start.

Other shares I would look at for big (and typically fully franked) cash dividends right now include Telstra Group Ltd (ASX: TLS), JB Hi-Fi Ltd (ASX: JBH) and Coles Group Ltd (ASX: COL).

But I think it is imprudent to build an income portfolio with these kinds of sources alone. Immediate cash flow is important, but so is finding the businesses that slowly but consistently raise their dividends most years if you've got more than two decades to play with.

Don't forget about dividend growth shares for passive income

In that light, I would also turn to Washington H. Soul Pattinson and Co Ltd (ASX: SOL) and Brickworks Ltd (ASX: BKW).

Neither of these companies are eye-catchers when it comes to yield right now. Soul Patts currently has a dividend yield of under 2.5%, as does Brickworks.

However, both of these businesses are arguably in the top tier of the ASX. Both have a long history of delivering market-beating returns to shareholders, and both have resilient and diversified investment portfolios of their own that help fund these dividends.

Speaking of dividends, Soul Patts has the best income streak on the entire ASX. It has raised its dividend every single year since 2000. Brickworks is a close second and hasn't cut its dividend payments since the 1970s.

Soul Patts' dividend yield may be under 3.5% today. But, as we covered last month, someone who bought shares of this company back in 2000 would be getting a yield on cost of over 20% today.

So I think a great way for someone at 40 who is looking to build a passive income portfolio is to choose a range of different income-providing shares for a diversified, yet cash-flowing share portfolio. It will take time, but luckily, you still have that on your side.

Motley Fool contributor Sebastian Bowen has positions in Telstra Group and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Brickworks and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia has positions in and has recommended Brickworks, Coles Group, Telstra Group, and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia has recommended Jb Hi-Fi. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Dividend Investing

Man putting in a coin in a coin jar with piles of coins next to it.
Dividend Investing

Where I'd invest $5,000 into ASX dividend shares right now

These stocks are strong contenders for passive income.

Read more »

Woman relaxing on her phone on her couch, symbolising passive income.
Dividend Investing

Why I think these 2 ASX dividend shares are ideal for income investors

These businesses offer a lot for income seekers.

Read more »

A woman sits at her computer with her hand to her mouth and a contemplative smile on her face as she reads about the performance of Allkem shares on her computer
Dividend Investing

Is the Suncorp share price a buy for passive income?

Investors could gain a lot of income from this stock.

Read more »

View of a business man's hand passing a $100 note to another with a bank in the background.
Dividend Investing

3 ASX dividend shares to buy with $10,000

Let’s see which shares brokers think are in the buy zone right now.

Read more »

Delighted adult man, working on a company slogan, on his laptop.
Dividend Investing

Why Macquarie predicts this high-yielding ASX 300 dividend stock is set to surge 32%

Macquarie expects some outsized returns from this ASX 300 dividend stock. Let’s find out why.

Read more »

A woman standing in a blue shirt smiles as she uses her mobile phone.
Dividend Investing

Buy Telstra and this ASX dividend stock for passive income

Macquarie thinks that these stocks could be top picks for income investors.

Read more »

A man holding a cup of coffee puts his thumb up and smiles while at laptop.
Dividend Investing

Analysts name the best ASX dividend stocks to buy this month

Let's see what they are saying about these income options.

Read more »

Australian dollar notes in the pocket of a man's jeans, symbolising dividends.
Dividend Investing

Buy these ASX dividend shares for 5% to 7% yields

Brokers think these shares could be top picks for passive income investors.

Read more »