How I’d invest $5,000 in high-yield ASX shares to earn a second income

© Provided by The Motley Fool
A man reacts with surprise when her see a bargain price on his phone.

© Provided by The Motley Fool
A man reacts with surprise when her see a bargain price on his phone.

So you want to invest $5,000 into ASX shares to produce a second income? Great idea. Passive income is something that I’m sure all of us would love more of.

What could be better than getting paid without needing to work? ASX dividend shares are a great way of gaining a secondary income source.

The dividends that income shares pay out are a true form of passive income. And unlike property, you can start receiving income from investing as little as $500.

So if you wanted to invest $5,000 into high-yield ASX shares, where is a suitable one to start?

Well, there are more than a few options you can choose from.

Where not to look for income in 2023

But let’s start with a couple of tips regarding areas to avoid. Firstly, don’t get trapped into a dividend share just because it has a high yield. For example, Magellan Financial Group Ltd (ASX: MFG) currently has a trailing dividend yield of 19.19% right now.

But Magellan has been bleeding customers for more than a year now, and few investors would expect the company to be able to maintain its 2022 dividends this year. That’s probably why the company has lost 40% of its value since last August. It could well be a classic ‘dividend trap’.

I would also avoid investment funds that charge high fees. Listed Investment Company (LIC) WAM Capital Ltd (ASX: WAM) currently has a trailing dividend yield of 9.63% on the table right now.

But this LIC charges an annual management fee of 1.25% whilst woefully underperforming far cheaper index funds over the past five years on a total returns basis.

How to invest $5,000 for high-yield ASX dividend shares

Instead, I would look to something like the Vanguard Australian Shares Index ETF (ASX: VAS). Right off the bat, this exchange-traded fund (ETF) charges a far more reasonable 0.1% per annum to its investors.

But this ETF holds 300 of the largest ASX shares in its portfolio. That gives investors massive diversification in one easy share. Most of the shares that this ETF holds are dividend payers too, which means that the income the fund receives from these shares is passed through to investors.

Last year, this ETF doled out a total of $6.36 in dividend distributions per unit. On today’s pricing, that gives the Vanguard Australian Shares ETF a trailing yield of around 7%. If it stays that way in 2023, you would look forward to a yearly income of $350 from your $5,000 investment right off the bat.

But if you are bent on investing in individual shares, there are plenty of good-quality names to choose from too. Some companies I would look to for solid income in 2023 and beyond include Westpac Banking Corp (ASX: WBC), Washington H. Soul Pattinson and Co Ltd (ASX: SOL) and Telstra Group Ltd (ASX: TLS).

These are healthily profitable, dominant and mature companies that (in my view) don’t have any red flags waving present.

The post How I’d invest $5,000 in high-yield ASX shares to earn a second income appeared first on The Motley Fool Australia.

More reading

Motley Fool contributor Sebastian Bowen has positions in Telstra Group, Vanguard Australian Shares Index ETF, and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia has positions in and has recommended Telstra Group and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia has recommended Westpac Banking. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.