How much would I need to invest in ANZ shares for $7,000 a year in passive income?

Owning ANZ Group Holdings Ltd (ASX: ANZ) shares can be rewarding in terms of passive income. I’m sure it’s a dream for plenty of Aussies to be able to enjoy thousands of dollars of dividends flowing into their bank account every year for no effort. In this article, I’m going to look at how many ANZ shares we’d need to own for $7,000 of passive income.

ANZ is one of the biggest ASX bank shares around, as well as Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC).

Why are ANZ shares able to generate such strong dividends?

As one of the biggest companies in Australia, its huge size gives it the ability to achieve good economies of scale.

It makes billions in profit every year, and the ASX bank share trades on a fairly low earnings multiple. In other words, ANZ has a low price/earnings (P/E) ratio. If a company pays a dividend, the lower the P/E ratio the higher the dividend yield. That’s why ASX coal shares can have such large yields.

The other part of the dividend yield equation is the dividend payout ratio. The more of its profit it pays out, the bigger the dividend yield – that’s applicable to ANZ shares or any other business that pays a dividend or distribution.

In FY23, the business paid an additional 13 cents per share to make up for the fact that the percentage of franking for the FY23 second-half dividend was reduced. Excluding that extra 13 cents, ANZ’s normalised dividend had a dividend payout ratio of 66% in FY23. In FY22 and FY21 the dividend payout ratio was 65%.

How big could the passive income be in FY24?

Amid the difficulties of strong banking competition and the danger of borrowers’ rising bad debts due to high interest rates, ANZ’s net profit after tax (NPAT) and dividend are expected to reduce in FY24.

According to Commsec, the ANZ share price is valued at 12 times FY24’s estimated earnings and could pay an annual dividend per share of $1.62. I’m not sure what the franking level is going to be in 2024, so I’ll just assume it is going to be partially franked again.

ANZ could pay a partially franked dividend yield of 6.3%, or 7.6% grossed-up at the same franking rate as the last dividend.  

Making $7,000 of passive income

Excluding franking credits, investors would need to own 4,321 ANZ shares to get $7,000 of cash dividends in FY24 from ANZ. It’s predicted to pay the same dividend in FY25.

At the current ANZ share price, we’re talking about an investment of around $111,000 to buy that many ANZ shares.

Diversification is an essential part of an investment strategy, so I wouldn’t rely on one ASX share for all of my dividend income. I’d buy a number of others to create a portfolio of dividendpayers.

Businesses that are growing earnings and dividends could be solid picks for long-term passive income.

The post How much would I need to invest in ANZ shares for $7,000 a year in passive income? appeared first on The Motley Fool Australia.

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More reading

• These ASX dividend stocks could be buys this month
• Here’s why I think the dividend forecast could send ANZ shares climbing
• Here’s how these top 3 performing ASX 200 bank shares stacked up in 2023
• Could this give ANZ shares an edge over the other ASX 200 banks?
• Passive income seekers: Make $1,540 in 2024 buying just 3 ASX 200 shares

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 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.

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