How I'd start making passive income from ASX dividend shares with $1,000

As Warren Buffett famously advised, "Hold cash for emergencies, then plan to spend the rest on smart investments."

| More on:
Happy female friends taking self portrait through mobile phone at pool's edge, symbolising passive income.

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

You don't need a fortune to start earning passive income from ASX dividend shares.

What you do need is a little patience and diligence.

Here's how I'd start earning passive income with just a $1,000 initial investment.

Targeting ASX 200 shares for passive income

As Warren Buffett famously advised, "Hold cash for emergencies, then plan to spend the rest on smart investments."

You want that emergency cash on hand to ensure you don't need to sell your ASX dividend shares at an inopportune time. Most stocks rise and fall throughout the year.

As Warren Buffett also said, "Our favourite holding period is forever." Meaning long-term investors can ride out any share price retrace and either hold onto their passive income stocks through retirement or sell at a hopefully profitable time of their choosing.

So, my first step is to seek out a high-quality S&P/ASX 200 Index (ASX: XJO) dividend stock to buy with my $1,000. I'd likely stick to the ASX 200, as larger companies tend to be less volatile, and many have lengthy track records of paying regular dividends.

I also prefer stocks paying franked dividends, so I can hold onto more of that passive income come tax time.

Now, keeping in mind the importance of diversification, I'd be hesitant to buy just one ASX 200 dividend stock. But I also wouldn't want to spread my $1,000 around across numerous shares, as brokerage fees would eat into my returns.

I'd therefore target a high-yielding ASX exchange-traded fund (ETF), like the BetaShares Australian Dividend Harvester Fund (ASX: HVST).

This ETF gives me instant diversity with exposure to a diversified portfolio of 40 to 60 ASX dividend shares across a wide range of sectors.

As at 31 October, the 12-month HSVT yield was 7.4%. The 12-month grossed-up yield, which includes franking credits (currently franked at 77%), is 9.9%.

And HVST pays out dividends every month, giving me a very regular passive income stream.

Patience

Now it's time to sit back and let the magic of compounding do its work.

At a 7.4% yield, I'll earn $74 per year in passive income, with potential tax benefits from those franking credits, with my $1,000 investment over the first year.

But rather than spend that money as it comes in, I'd reinvest it.

Without doing anything else, and assuming no change in the HSVT share price and that it maintains the 7.4% annual yield, that would see my $1,000 investment grow to $9,145 in 30 years.

That sum would yield me $677 in annual passive income.

But, taking Warren Buffett's advice, I'd also invest more of my non-emergency cash in ASX 200 dividend shares over time. Say an extra $100 per month.

With the same return assumptions, that would see my ASX dividend portfolio grow to $141,222 in 30 years.

And at a 7.4% yield, that would see me earning $10,450 a year in passive income to sweeten my retirement.

Motley Fool contributor Bernd Struben 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 no position in any of the stocks mentioned. 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 pointing an upward line on a bar graph symbolising a rising share price.
Dividend Investing

3 growing ASX dividend stocks to buy now

Analysts are expecting these stock to paying growing dividends.

Read more »

Man holding out $50 and $100 notes in his hands, symbolising ex dividend.
Dividend Investing

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

These two stocks look irresistible to me.

Read more »

Smiling business woman calculates tax at desk in office.
Dividend Investing

Turn tax return into passive income with these ASX dividend shares

These options can bring solid returns through passive income. 

Read more »

Hand holding Australian dollar (AUD) bills, symbolising ex dividend day. Passive income.
Dividend Investing

Forget term deposits, these ASX dividend shares offer ~5% to 11% yields

Analysts think these shares could be better than term deposits. Let's find out what yields they offer.

Read more »

Tax time written on wooden blocks next to a calculator and Australian dollar notes.
Tax

Tax time: Use this hack to keep the Australian Tax Office off your back

Buying dividend shares can save you paying taxes...

Read more »

Man smiling at a laptop because of a rising share price.
Dividend Investing

2 exciting high-yield ASX dividend shares I'd buy in June

These stocks have a lot to offer investors focused on income.

Read more »

A male investor sits at his desk looking at his laptop screen holding his hand to his chin pondering whether to buy Macquarie shares
Dividend Investing

Looking for passive income amid falling interest rates? Check out this top ASX All Ords dividend stock

This high-yielding ASX dividend stock can help boost your passive income amid falling interest rates.

Read more »

A man sits in deep thought with a pen held to his lips as he ponders his computer screen with a laptop open next to him on his desk in a home office environment.
Dividend Investing

Down 34% since 2021, does this ASX dividend share still offer investors a 10% yield today?

There are a few warning signs over this stock.

Read more »