3 handy tips to squeeze the most passive income from ASX 200 shares

S&P/ASX 200 Index (ASX: XJO) dividend shares are back on centre stage.

With bank deposit rates failing to keep up with inflation, more investors are turning to ASX 200 shares to secure valuable passive income streams.

But not all income stocks are created equal.

So, here are three handy tips to squeeze the most passive income from ASX 200 shares.

Steer clear of this trap

The first tip we’ll cover is a type of dividend share to do your best to avoid.

This is a company that’s quoting an attractively high trailing dividend yield, but one that is unlikely to be able to sustain that yield moving forward.

You may have heard these called dividend traps, or value traps.

Investors can stumble into these traps on several fronts.

First, an ASX 200 company may have seen its share price halve in value since its last dividend payout. This could happen due to a variety of company-specific, broader market-related, or legal reasons.

When the share price is halved, the trailing yield is doubled. While that looks good on paper, there’s a very good chance the upcoming dividend payouts will be significantly reduced.

Ideally, you want to invest in an income stock that’s been growing its market share and profits, and increasing its dividends consistently over the past several years.

Second, some ASX 200 shares operate in highly cyclical sectors, like resources. When the price of those resources is high, so are the profits and resulting dividend payouts.

These are good passive income stocks to hold during the rising part of the resource cycle. But you’ll likely find the dividends falling along with the price of those resources as the cycle enters its downturn.

ASX 200 shares with tax benefits

The second handy tip to get the most passive income from your investments is to focus on ASX 200 shares with fully franked dividends.

Australia is fairly unique in that investors receive credit for any taxes a company has already paid on its profits when it comes to dividend payouts.

That means if a company has paid its full 30% corporate tax rate down under, its dividends will be 100% franked. Come tax time, to avoid double taxation, that in turn means the investor won’t be liable for that part of the tax burden.

If your personal tax rate is less than 30%, you should even be eligible for a rebate on the difference.

But regardless of your personal tax rate, fully franked dividends will help you squeeze the most passive income from your ASX 200 shareholdings.

Reinvest and compound

Which brings us to our third handy tip to get the most passive income from your ASX 200 shares.

The dividend reinvestment plan (DRP).

Not all companies offer these. But it’s worth favouring those who do, so long as you don’t require access to your passive income payments straight away.

Participating in a company’s DRP is voluntary. And you can opt to fully or partly reinvest your dividend payment.

Opting for the DRP has several advantages.

First, you won’t have to pay any trading fees or transaction costs.

Second, you put the power of compounding to work for you. Meaning you’ll now be earning a yield on those reinvested dividends.

Over time, the power of that compounding can help you get a lot more passive income from your ASX 200 shares than you may have thought possible.

The post 3 handy tips to squeeze the most passive income from ASX 200 shares appeared first on The Motley Fool Australia.

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Motley Fool contributor Bernd Struben 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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