Buying the S&P/ASX 200 Index (ASX: XJO) stock Coles Group Ltd (ASX: COL) could be one of the most effective ways to unlock $1,000 of monthly passive income in the form of dividends.

Now don’t get me wrong – this would take a sizeable investment to achieve. Reaching annual income of $12,000 from one ASX 200 stock would be a notable achievement.

But, it’s easier to achieve that with an investment of the quality of Coles shares, partly thanks to its appealing dividend yield.

Coles is the operator of Coles supermarkets around Australia, as well as a number of different liquor retailers including Liquorland.

$1,000 of monthly passive income from Coles

Coles has been one of the limited few ASX 200 stocks that have increased the dividend each year since COVID-19 in 2020, 2021, 2022, and the latest half-year announcement.

I think that’s a solid record, but perhaps not too surprising consider the defensive nature of supermarket retailing. We all need to eat food.

The recent inflation situation has meant that Coles has been able to increase its gross profit margin as well as its net profit after tax (NPAT) margin. This has enabled the business to increase its dividend at a pleasing pace.

Using the estimate on Commsec, the company is expected to pay an annual dividend per share of 65 cents.

At the current Coles share price, that represents a grossed-up dividend yield of 5.2%.

Let’s crunch the numbers

To generate $1,000 of monthly passive dividend income, we’re talking about $12,000 of annual dividends and then splitting that equally between 12 months.

To make $12,000 of annual income, an investor would need to own 18,462 Coles shares. The current cost of that would come at around $330,000.

But, Coles is expected to grow its dividend in both FY24 and FY25.

By FY25, the supermarket ASX 200 stock could pay an annual dividend per share of 76 cents. That would represent growth of around 17% compared to FY23.

An annual dividend payment of 76 cents per share would be a grossed-up dividend yield of 6.1% for FY25.

If investors used the FY25 payout, investors would need to buy 15,790 shares.

What could drive the earnings higher?

If earnings go higher, then it could help drive the Coles share price and the passive dividend income higher.

Coles has a number of positive tailwinds. Inflation is enabling the business to earn higher revenue and then generate higher profit, with its margins being maintained (and increased).

But, it continues to open new stores, which boosts its overall earnings potential. It’s also benefiting from the steadily-rising population of Australia (which means more customers).

The company is working on its ‘smarter selling’ strategy, which involves being more efficient, cutting costs and being more sustainable.

Coles is also working on new, large, automated warehouses, which could make the business much more efficient in those regions, save costs and improve stock flow.

Coles share price snapshot

Over the past six months, the ASX 200 stock has lifted more than 7%.

The post For $1,000 in monthly passive income, buy 18,462 shares of this ASX 200 stock appeared first on The Motley Fool Australia.

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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 Coles Group. 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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