Here’s one way to invest $20k to target an average 7% ASX dividend yield

The share market is a great place to find great dividend stocks that offer an ASX dividend yield of at least 7%.

It’s pleasing to receive annual passive income without having to do any work.

An investor with $20,000 to invest in ASX dividend shares can unlock a pleasing level of cash flow. But, we shouldn’t expect to generate enough income to retire with $20,000 instantly.

Income-seeking investors want a generous ASX dividend yield from their investments – a 2% dividend yield isn’t going to cut it. However, trying to find stocks that yield above, say, 10%, can be dangerous because that may not be sustainable.

Finding the right balance

It’s important to understand why businesses have a high dividend yield before we buy them.

Does a stock have a high yield because the share price has been crunched, profit is falling, and the next dividends are going to be smaller?

Is the yield currently high, but the company is in a very cyclical industry, and therefore, the dividend is unreliable?

Or perhaps the stock is wrongly undervalued by the market and it can maintain that level of dividend payments for the foreseeable future?

One major factor to consider is the dividend payout ratio – how much of the company’s annual profit is paid as dividends. The higher the payout ratio, the higher the ASX dividend yield, but also the less that’s being retained in the company to reinvest for future growth.

Some businesses are capable of growing earnings and sustaining a very high dividend payout ratio, while others may need to keep some profit just to keep next year’s earnings at a similar level.

ASX dividend shares I’d choose for yield

I’d go for businesses that are expected to have a high ASX dividend yield for the foreseeable future and can deliver earnings growth.

Telstra Group Ltd (ASX: TLS) shares could provide a large dividend yield, supported by growing earnings amid rising mobile prices and subscriber growth. According to Commsec, the telco is expected to pay a grossed-up dividend yield of 7.1% in FY25, with further growth in FY26.

Metcash Ltd (ASX: MTS) supplies various independent food and liquor retailers, including IGA, IGA Liquor, Bottle-O, Cellarbrations and Porters Liquor. It also owns hardware businesses, including Mitre 10, Home Timber & Hardware and Total Tools. Population growth and a recovery of hardware earnings are potential future tailwinds. Commsec estimates imply a grossed-up dividend yield of 8% in FY25 and growth in FY26.

Medibank Private Ltd (ASX: MPL) is the largest private health insurer. It’s benefiting from rising premiums, strong investment returns on its assets and growing subscriber numbers. Commsec numbers suggest a grossed-up dividend yield of 6.6% in FY25, with further growth in FY26.

Universal Store Holdings Ltd (ASX: UNI) is a retailer of premium youth fashion. It has grown its dividend each year since 2021, when it started paying one. The business can benefit from an ongoing store rollout and an eventual recovery of household retail spending. Commsec numbers suggest a forecast grossed-up dividend yield of 7.7% in FY25 and an even bigger dividend in FY26.

I think that’s a good starting point for an ASX dividend portfolio. The forecast average grossed-up dividend yield for FY25 of the stocks I’ve mentioned is about 7.3%, so a $20,000 investment spread evenly between them would generate $1,460.

The post Here’s one way to invest $20k to target an average 7% ASX dividend yield appeared first on The Motley Fool Australia.

More reading

• Buy Telstra and these ASX dividend stocks this week
• Buy these ASX dividend shares with 5% to 7% yields
• Here is the earnings forecast out to FY28 for Telstra shares
• Why analysts rate these ASX dividend shares as buys
• If I were 60 I’d buy these ASX shares for dividends

Motley Fool contributor Tristan Harrison has positions in Metcash. 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 Telstra Group. The Motley Fool Australia has recommended Metcash. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.