The ASX stock market is a fantastic place to unlock an additional source of income for Australian investors. Dividends are a wonderful way to passively boost how much income an investor can make each year. Aussies can build up a significant level of annual dividends.
Job earnings are great, but there is an upper limit to how much we can work each week.
Investing in shares means having a small piece of ownership in businesses that are working hard to make profit. They can use some of that profit to fund growing dividends and invest for future growth.
Generating $50,000 of annual dividends won’t be a quick result (unless you win the lottery). But, by starting now, investors can give themselves as much time as possible to benefit from compounding.
Never underestimate compounding
By investing as little as $1,000 (or even less), investors can put money into shares and start seeing the passive income rolling in.
Let’s say a business has a 4% dividend yield, and it grows its dividend by 10% per year. In the first year, if someone invested $1,000, it would pay $40 of annual dividends that we could add to our personal finance budget.
If the business hiked its dividend by 10%, in the second year the dividend payment would be $44.
Another 10% increase would make that amount $48.40 in the third year.
And so on.
In the 10th year, it would be $94.30 of annual dividends.
All of those above numbers are based on the investor only investing $1,000 once. It also assumes no re-investment of dividends into buying new shares.
Dividend re-investment plans (DRP) make it very easy to re-invest dividends into new shares for no transaction fees. This allows investors to significantly boost the growth of their divided income. Over a 10 year period, it would mean buying hundreds of dollars of more shares.
Invest regularly to reach $50,000 of annual dividends
By making regular contributions to our share portfolio, such as monthly or every two months, we can create that desired income.
For example, if someone invested $1,000 every month and it returned an average of 10% per year (the long-term ASX share market average return), that would turn into a portfolio worth more than $1.05 million. Depending on the dividend yield of a portfolio, that could allow investors to generate $50,000 of annual dividends.
I’m aiming to build that sort of financial picture for myself, though I’m still a long way from achieving it.
I am investing in ASX shares I believe can deliver strong total returns, including a good dividend yield. I can re-invest those dividends into buying more shares or spend that money â that’s up to me as the months and years go by.
Some of my favourite ASX dividend stocks for this objective include Washington H. Soul Pattinson and Co. Ltd (ASX: SOL), MFF Capital Investments Ltd (ASX: MFF), L1 Long Short Fund Ltd (ASX: LSF), WCM Quality Global Growth Fund (ASX: WCMQ) and WCM Global Growth Ltd (ASX: WQG).
The post How to boost your income with $50,000 of annual dividends appeared first on The Motley Fool Australia.
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More reading
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- Spend $20,000 on ASX shares and get $5,000 in passive income
- 2 ASX income stocks with rocketing dividends
- Want to build up a second income? These 2 top ASX shares are a buy
Motley Fool contributor Tristan Harrison has positions in L1 Long Short Fund, Mff Capital Investments, Washington H. Soul Pattinson and Company Limited, Wcm Global Growth, and Wcm Quality Global Growth Fund. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia has positions in and has recommended Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia has recommended Mff Capital Investments. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.