To draw $36,000 a year from Australian shares, an investor needs roughly $720,000 in the market at a 5% grossed-up yield. At 4%, the bill rises to $900,000. Those figures, from the investing platform Crowdfolio, explain why the dream of living on dividends is mostly an exercise in arithmetic: income depends on two things, how much capital you start with and what yield it earns.
Australia is well suited to income seekers. Morningstar’s analysts note that local companies pay out a larger share of profit than most foreign markets, and franking credits sweeten the result. Full franking passes on a credit equal to the 30% corporate tax rate, or 25% for smaller base-rate companies with turnover under $50 million. The major banks, Crowdfolio says, typically pay fully franked dividends at 5% to 7%.
A narrow market
The catch is concentration. Morningstar found that 10 companies supply nearly 60 percent of what an ASX 200 index buyer collects in dividends, among them BHP, Commonwealth Bank, National Australia Bank, Rio Tinto and Woodside. Their average yield is 5.30%. Yet the firm’s analysts do not forecast much dividend growth across the coming 5 years for many of them. Financial services and basic materials dominate, and local dividend growth has trailed global markets.
That matters for anyone building a pile slowly. A small portfolio, even at a good yield, throws off little. A 4% yield growing at 5% per year will overtake a static 6% yield within a few years, Crowdfolio points out, and it carries less payout risk.
When a high yield is a warning
Crowdfolio’s advice is blunt. Across blue-chip income stocks, yields typically run from 3% to 7%. A 9% yield should raise more questions than a 4.5% one, because a yield that sits above the range often points to a stretched payout ratio, a sliding share price, or both. A payout ratio of 90% to 100% or more leaves little cushion if earnings fall. Crowdfolio lists a payout over 100% of earnings for two periods running, and any recent dividend cut, as red flags.
Banks carry their own risk, since profits follow interest rate cycles, credit conditions and loan arrears. Crowdfolio suggests spreading money across banks, property trusts, infrastructure, healthcare and consumer staples. Lower-yielding sectors, typically 2% to 4%, still help by smoothing income when cyclical sectors cut payouts. Income ETFs offer the same spread in a single holding, though a high distribution yield with minimal franking and high fees can deliver less after tax than it appears.
The practical lesson is plain. Without a large base, the yield cannot do the work. Morningstar’s own preference is a mix of high current yield and future growth, since both are needed for passive income that lasts.
Sources
- ASX Dividend Shares for Passive Income: How to Pick Them (Crowdfolio)
- 10 top ASX dividend shares (Morningstar Australia)
