ASX passive income shares can be the source of a steady flow of dividends. By building up a portfolio of good businesses, investors can unlock an impressive annual dividend stream which can translate into $200 of weekly passive income.
There aren't any ASX shares that pay dividends weekly to investors, so we're aiming for an annual target of $10,400. While this isn't a quick project, over time I think it's certainly possible.
For starters, Aussies need to be able to achieve enough spare cash flow in their personal finances to invest regularly. Here are the next steps:
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Buy into quality ASX shares
If I'm building towards a long-term passive income goal, I'm not going to go for weak businesses.
I'd like to buy a small slice of ASX shares that have demonstrated a good dividend record, want to continue rewarding shareholders with growing dividends, and operate in attractive industries where they have good long-term growth potential.
It doesn't mean that the companies have to shoot the lights out, just deliver solid long-term compounding growth.
Dividend growth
I only like to look at businesses that seem like they're going to grow dividends for the foreseeable future.
Whether inflation is high or low, it still eats into the value of a dollar, so protecting and growing our income stream is important.
I also think it's important to find businesses that are growing their dividends because it's a sign the company's board is confident about the future. When economic times are tough, I'd want a high degree of confidence that my income is going to keep coming. Certainly, a cut during that time could be difficult.
Dividend yield
Shares can provide capital growth and passive income. I think a mix of both is a good idea for total returns, although it depends on what investors are looking for.
Aussies who generate taxable income of more than $45,000 are taxed at a rate of 32.5% (plus the 2% Medicare levy), so receiving huge dividend yields may not make the most sense if a third (or more) of passive income is being lost to tax.
For Aussies in a lower tax bracket — or no tax bracket — higher dividend yields make more sense.
Which ASX dividend shares I'd pick for passive income
For lower dividend yields, I'd go for names like investment conglomerate Washington H. Soul Pattinson and Co. Ltd (ASX: SOL), diversified property and investment business Brickworks Limited (ASX: BKW), global pathology company Sonic Healthcare Ltd (ASX: SHL), and energy infrastructure business APA Group (ASX: APA).
Each of the above businesses has grown their passive income payments for at least a decade, and have dividend yields ranging between 3.4% to 5%. But, of course, dividend growth is not guaranteed.
In terms of higher-yielding ASX dividend shares, there are some names that have the intention to pay investors a high level of dividends, though they may not increase every single year.
In this category, I like Bunnings owner Wesfarmers Ltd (ASX: WES), IGA supplier Metcash Ltd (ASX: MTS), Rural Funds Group (ASX: RFF), fund manager GQG Partners Inc (ASX: GQG), fund manager investor Pacific Current Group Ltd (ASX: PAC), and retailer Shaver Shop Group Ltd (ASX: SSG).
For example, Wesfarmers could pay a grossed-up dividend yield of around 5.5% in FY24, while Shaver Shop might pay a grossed-up dividend yield of more than 14% in FY24. Others in this group might pay a yield of between 7% to 10% in FY24, according to Commsec estimates.
Foolish takeaway
The yield of businesses we're looking at will determine the size of the portfolio we need to generate $200 of weekly passive income, or $10,400 of annual income.
A dividend yield of 4% would require a portfolio worth $260,000. But, if the portfolio had a grossed-up dividend yield of 8%, then we'd only need $130,000. A mixture of regular investment, dividend re-investment, and benefiting from compounding can help achieve the passive income goal.
