A yearly passive income of $3,000 from ASX shares might not be life-changing.
But it sure would come in handy.
Depending on my situation, I might choose to reinvest some or all of that back into ASX dividend shares. Or I might choose to use that passive income to pay off some bills. Or maybe take a nice vacation.
Whether I opt to reinvest or spend it, here’s an idea of how much I’d need to invest today to get to my $3,000-a-year goal.
Trailing yields versus forecast yields
Before looking at two examples, a note on yields.
When running your slide rule over ASX dividend shares in the hunt for reliable passive income you can come across two types of yields.
The most common ones you’ll see quoted are trailing yields.
These are based on the past 12 months of dividend payments, divided by the company’s share price. Trailing yields are backwards looking by definition. Future yields may be higher or lower depending on a range of company-specific and macroeconomic factors.
Then there are forecast yields.
These are put together by analysts who’ve researched the ASX share in question along with the markets it operates in. These analysts then attempt to forecast how much the company will pay out in dividends over the coming 12 months. The thing to remember here is that, at the end of the day, the forecast yield is just these analysts’ best guess.
Now, on to how much I’d need to invest today for a $3,000 annual passive income.
Targeting passive income from ASX shares using forecast yields
For our first example, we’ll use forecast yields as our metric. And I’ll target Bank of Queensland Ltd (ASX: BOQ).
In morning trade on Friday, the S&P/ASX 200 Index (ASX: XJO) bank share is trading for $5.95 a share.
As for passive income, Bank of Queensland paid out 44 cents per share in fully franked dividends over the past 12 months. But using this would give us a trailing yield.
Looking to FY 2024, CommSec forecasts that Bank of Queensland will pay 42 cents per share in dividends.
At the current share price, that works out to a forecast yield of 7.1% for the financial year ahead.
If I were aiming to earn my $3,000 in annual passive income solely from this ASX share, I’d need to invest $42,493 today.
Targeting passive income from ASX shares using trailing yields
For our second example, we’ll use trailing yields as our metric. And I’ll target Yancoal Australia Ltd (ASX: YAL) for that passive income.
At the time of writing, the Yancoal share price is trading at $5.03 a share.
The ASX coal share has been paying out some juicy dividends amid last year’s record thermal coal prices. Coal prices have retreated from those records, but they certainly could soar higher again in the year ahead.
Yancoal delivered two fully franked dividends over the past 12 months for a total of $1.227 per share.
At the current share price, that equates to a trailing yield of 24.4%.
If I was planning to invest solely in this one stock for my $3,000 in passive income, I’d need to invest $12,295 today.
Foolish takeaway
Now, we only looked at two ASX shares here.
To build a reliable passive income stream, I’d aim to expand that to at least five stocks and probably more like 10, ideally operating in different sectors.
But I think these two would be good places for me to get started.
