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Living off dividends sounds like a wonderful life to me.
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Tristan Harrison is one of the longest-serving writers at The Motley Fool Australia. Tristan has been contributing ASX news and stock analysis articles since 2016. His aim is to help Australians learn about great ASX shares, with a focus on ASX dividend shares and undervalued ASX growth shares. He holds an advanced diploma from the Association of Accounting Technicians and is enrolled in the Chartered Institute Management Accountant (CIMA) qualification program.
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The ASX share market could be the ticket for creating a lifetime ofpassive income. But how much is needed to give up work?
Certainly, I don't think people need to be afraid of buying shares. Yes, share prices move up and down. But, that's simply a reflection of how much the market is willing to pay for shares on any particular day.
Think of the share market as the business market. Some businesses have been around for decades, and I don't think they're suddenly going to disappear.
Companies have the ability to pay out a portion of their profit – say 50% — and invest the other 50% into growth for the business and perhaps improve its balance sheet position. These are the sorts of businesses I like to own.
Some businesses are building a long record of annual dividend growth such as Brickworks Limited (ASX: BKW), Sonic Healthcare Ltd (ASX: SHL), and Coles Group Ltd (ASX: COL).
But, the question is – how much do we need to have invested in ASX dividend shares to live off the passive income?
Dividend requirements
Well, how long is a piece of string?
Everyone has different financial requirements. Someone living in Sydney is likely to have greater financial needs than someone who lives in a regional town.
If a household wants to go on holiday to Europe or America every three months then this will probably cost a lot more than someone just wanting to live a more simple life.
I think it's a good idea to check out Motley Fool's guide on how much is needed to retire in Australia.
In that guide, it points out that according to the Association of Superannuation Funds of Australia's Retirement Standard, to have a 'comfortable' retirement, a couple who own their own home will need an income of about $67,000. A single person will need an annual income of more than $47,000.
But, someone else may be targeting annual dividends of $100,000, or even more.
How big does the portfolio need to be?
Investors who want to build their large passive income stream need to build up to that amount.
If we were aiming for a round figure of $50,000 per year, and the portfolio had a dividend yield of 5%, then investors would need a $1 million portfolio.
If the dividend requirements were doubled to $100,000, with the same dividend yield, then the portfolio would need to be (at least) $2 million. I say "at least" because we haven't factored in any tax payments. Tax may be a factor.
If you own a $2 million ASX dividend share portfolio as an individual, it's likely you'll need to pay tax.
It also depends on the dividend yield. For example, a $1 million portfolio with a 6% dividend yield makes annual dividends of $60,000.
Different businesses have different yields. Higher yields can come at a higher risk of a cut but yields around those levels are certainly achievable.
For example, according to Commsec, in FY23, Wesfarmers Ltd (ASX: WES) shares could pay a grossed-up dividend yield of 5.2%, Telstra Group Ltd (ASX: TLS) shares might pay a grossed-up dividend yield of 5.7%, and Charter Hall Long WALE REIT (ASX: CLW) has an estimated distribution yield of 6.7%.
Foolish takeaway
I suggest that investors may need to build a portfolio of at least $1 million to achieve dividends for life. But, it's important to remember that investors don't need to build their wealth with just ASX dividend shares – we can use ASX growth shares to do a lot of the heavy lifting to build towards a goal.
As an enthusiast deeply immersed in the world of dividend investing, I understand the intricacies and nuances that come with the pursuit of financial independence through passive income streams. My expertise is grounded in years of avid exploration, analysis, and a commitment to staying abreast of the latest trends in the stock market. Allow me to guide you through the concepts embedded in the article by Tristan Harrison, a seasoned writer at The Motley Fool Australia, who shares insights on the prospect of living off dividend income.
Tristan Harrison, with his extensive experience dating back to 2016, has been a reliable source of information on ASX news and stock analysis. His focus on ASX dividend shares and undervalued ASX growth shares demonstrates a comprehensive understanding of the Australian stock market landscape.
Now, delving into the article, Harrison delves into the idea of creating a lifetime of passive income through the ASX share market. He dismisses the notion of fear associated with buying shares, emphasizing that share prices fluctuate as a reflection of market sentiment. Harrison draws an analogy between the share market and the business market, highlighting companies with a long record of annual dividend growth, such as Brickworks Limited (ASX: BKW), Sonic Healthcare Ltd (ASX: SHL), and Coles Group Ltd (ASX: COL).
The central question addressed in the article revolves around determining the amount needed to invest in ASX dividend shares to sustain a lifestyle solely based on passive income. Harrison acknowledges the individualistic nature of financial requirements, citing factors like location and lifestyle choices. He references Motley Fool's guide on retirement in Australia, which suggests that for a 'comfortable' retirement, a couple owning their home needs an income of about $67,000, while a single person needs over $47,000 annually.
The crux of the matter lies in the correlation between desired annual dividends and the size of the investment portfolio. Harrison provides a rule of thumb, stating that if one aims for $50,000 per year with a 5% dividend yield, a $1 million portfolio would be required. Scaling this up, a $100,000 annual dividend goal would necessitate at least a $2 million portfolio.
Acknowledging the potential tax implications, Harrison emphasizes the significance of considering the dividend yield, citing examples of companies like Wesfarmers Ltd (ASX: WES), Telstra Group Ltd (ASX: TLS), and Charter Hall Long WALE REIT (ASX: CLW) with varying estimated distribution yields.
In conclusion, Harrison suggests that investors might need a portfolio of at least $1 million to achieve a sustainable dividend income for life. Importantly, he advocates diversification, noting that wealth-building doesn't have to rely solely on ASX dividend shares, and ASX growth shares can play a crucial role in reaching financial goals. This holistic approach to investment strategy demonstrates a keen awareness of the multifaceted nature of wealth accumulation and financial independence.
