How to create a yearly income of $100,000 in dividends

Want to create a yearly income of $100,000 in dividends? You can set your wealth on course for a great outcome.

But, you need to do more than what the average Australian is doing considering the average Australian household is only saving 2.5% of income at the moment.

Here is how you can do it:

Step 1: Earn and save

Sadly, money doesn’t grow on trees. To increase your wealth you have to put in the time and effort to earn some money and then spend less than you earn.

Each household has a different budget and everyone earns money in different ways. There isn’t one right answer about how much you should earn or save. It doesn’t matter if you earning $50,000 or $250,000 – it’s about how much you save that counts.

Spending money on the basic necessities is unavoidable, but once you’ve covered those outgoings it’s a combination of earning more and avoiding complete lifestyle inflation for your additional dollars.

Step 2: Invest

Once you’ve saved up some money it’s time to put it to work for the long-term.

I believe there are two good options for investing your money that would be the best for your wealth and/or life.

The first option is to spend as little time looking at shares as possible. Only choose quality diversified investments, then don’t worry about them and completely ignore market volatility. This approach should lead to perfectly good compounded returns and also give you more time to spend earning more money, or more time for your personal life. Some good options for this approach include: MFF Capital Investments Ltd (ASX: MFF), Vanguard MSCI Index International Shares ETF (ASX: VGS) and iShares S&P 500 ETF (ASX: IVV).

The other option is to maximise your investment returns as much as possible. That doesn’t mean speculative shares, it just means finding quality ASX shares that can generate strong long-term returns. Shares like Altium Limited (ASX: ALU), Costa Group Holdings Ltd (ASX: CGC), REA Group Limited (ASX: REA) and WAM Microcap Limited (ASX: WMI) are good long-term options.

Final Step: Re-invest until the goal is reached

The power of compounding works best when you re-invest your dividends into more shares along the way. That doesn’t even mean using the dividend re-investment plans, you can take it as cash and invest in the best opportunity you see.

If the grossed-up dividend yield for your portfolio is around 6% it would take a portfolio of approximately $1.66 million to hit your income target. That seems like a lot of money. Of course, it is a lot of money. But let’s do some maths. If you start with $0 and invest $1,000 a month, which compounds at 10% a year, it would only take 27 years to reach your goal of $100,000 a year in annual income.

It can be quite possible to generate returns of more than 10% a year, bringing you much quicker to your goal. You could earn those much better returns by buying top quality ASX shares like these for your portfolio.

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Motley Fool contributor Tristan Harrison owns shares of Altium, COSTA GRP FPO, Magellan Flagship Fund Ltd, and WAM MICRO FPO. The Motley Fool Australia owns shares of and has recommended COSTA GRP FPO. The Motley Fool Australia owns shares of Altium. The Motley Fool Australia has recommended REA Group Limited and Vanguard MSCI Index International Shares ETF. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. 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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