Dividend investing is one of the best ways anyone can achieve a stream of passive income. Sure, it might not have the allure of producing TikTok videos, or the glamour of drop shipping. But ASX dividend shares can offer a strong, dependable and immediate source of secondary income that you can start using right way.

Let’s now look at what would be the best way to build up a portfolio of ASX dividend shares that could have the potential to generate $40,000 in annual passive income for an investor.

Right off the bat, it’s worth pointing out that building a portfolio of ASX dividend shares that is capable of generating $40,000 in dividend income is not an easy task. It will take years of patience and discipline, not to mention a lot of capital to invest.

But don’t let that put you off. The reward of gaining such a high level of passive income is clearly worth a lot of effort. So let’s get started.

The first thing we need to do is build a portfolio of ASX dividend share candidates that will fund our stream of passive income.

Following good investing practise, we should have a diversified portfolio of dividend-paying shares, that cover multiple sectors of the economy.

Building a $40,000 passive income portfolio

To start with, I would choose Westpac Banking Corp (ASX: WBC). Westpac is one of the big four ASX banks and has a long history of paying robust dividends. Right now, its shares offer a dividend yield of 6.34%.

Then, let’s add Coles Group Ltd (ASX: COL). Coles may not have as high of a yield as Wesptac today, with its 3.65%. But Coles brings a lot of defensive stability to the table, given its consumer staples nature, and inflation-resistant properties. Unlike Westpac, this ASX 200 dividend share did not cut its payouts during the COVID-ravaged years of 2020 and 2021.

Telstra Group Ltd (ASX: TLS) makes the cut, for similar reasons. It currently has a dividend yield of 3.94%.

Then, let’s throw in ASX retailers JB Hi-Fi Limited (ASX: JBH), Super Retail Group Ltd (ASX: SUL) and Harvey Norman Holdings Limited (ASX: HVN). These retailers have dividend yields of 7.63%, 6.03% and 8.38% respectively as of yesterday’s close.

Retail is one of the more cyclical sectors of the ASX, but these companies are all of the highest calibre and have been at the top of the ASX retail pole for decades. Plus, these extremely lucrative dividend yields arguably make up for the cyclicality they bring to the table.

Finally, let’s add Washington H. Soul Pattinson and Co Ltd (ASX: SOL). Soul Patts might have the lowest dividend yield of all of these shares at present, currently sitting at 2.43%. But it also has the high honour of having the best dividend record on the ASX, with a 22-year-and-counting streak of delivering annual dividend increases.

The ASX dividend share waiting game

If we invest $60,000 into each of these dividend shares right now, we would immediately gain a passive income stream of $22,277 per annum (assuming those dividend yields hold).

Well, that’s a good start, but it’s not $40,000.

But let’s now assume that each of these divided shares increases their annual payouts by 5% every year going forward. That’s not an unreasonable assumption. For example, last year, Westpac increased its 2022 dividends by 5.93% over 2021’s levels.

Harvey Norman jacked up its dividend by a similar amount. Soul Patts managed a 16% hike, which more than makes up for Coles and Telstra’s more conservative increases of around 3% each.

If our dividend portfolio can bank an average 5% increase in yield every year going forward, it would only take 12 years before our $22,277 stream of passive income turns into $40,006 per annum.

As we discussed earlier, achieving a $40,000 stream of passive dividend income from ASX shares is not easy. But it certainly can be done if given enough time, patience and discipline.

The post Turning ASX shares into a $40,000 annual passive income generator appeared first on The Motley Fool Australia.

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More reading

• 3 ASX 200 shares with strong balance sheets
• How much would I need to invest in ASX shares for a retirement income of $65,000 per year?
• It’s still rare to find a term deposit paying over 5%. Why not buy ASX dividend shares instead?
• Snapped up $5,000 worth of Westpac shares on the June dip? Here’s the passive income you’re earning now
• The top 10 ASX shares held by millionaires

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 Harvey Norman, Super Retail Group, and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia has positions in and has recommended Coles Group, Harvey Norman, Super Retail Group, Telstra Group, and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia has recommended Jb Hi-Fi and Westpac Banking Corporation. 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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