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Here’s how to create a yearly income of $100,000 in dividends

I think achieving an annual dividend income of $100,000 is quite simple, but it isn’t easy. You just have to follow the three below steps:

Step 1: Earn money and save it

Money doesn’t grow on trees, as much as our ASX banks would like you to think of a credit like that.

The first thing you need to do is make some money by working for it, whether it’s as an employee in a job or working in your own business. After you’re earning you have to live below your means, also referred to as ‘spending less than you earn’.

Everyone’s budget is different. Your best friend will have a different budget to yours, as will your sibling or parents. There’s no right answer about how much you should earn or save. It doesn’t matter whether you earn $50,000 or $250,000, it’s about how much you save.

Of course, we all have to spend a certain amount of money to have a roof over our heads, put food on the table and pay for gas & electricity. But after the basics are covered, getting ahead is a combination of earning more and avoiding lifestyle inflation for your increased earnings so that your savings can grow.

Step 2: Invest

Once you’ve saved at least $500 (and a little for brokerage) you can put the money to work into the share market. It might be better to invest a larger amount (eg $1,000) so brokerage is less of a percentage of your investment amount.

To get the best out of your share investing I think there are two different ways to do well for your wealth and/or life.

The first way is to spend very little time looking at shares. Go for diversified investments, don’t look at how your shares are going and completely ignore share market volatility. I believe this approach is excellent because it allows compounding to do its magic and you have more time to earn more money or spend more time on yourself. I believe some of the best options to pursue this course are Vanguard MSCI Index International Shares ETF (ASX: VGS)iShares S&P 500 ETF (ASX: IVV), Magellan Global Trust (ASX: MGG)MFF Capital Investments Ltd (ASX: MFF) and WAM Global Limited (ASX: WGB).

The other way is to try to create the best investment returns you can. I am not referring to chasing speculative opportunities, I simply mean finding high-quality ASX growth shares and buying them at good prices. Some of the shares that I think fit the bill right now are: Costa Group Holdings Ltd (ASX: CGC), Bapcor Ltd (ASX: BAP) and Washington H. Soul Pattinson and Co. Ltd (ASX: SOL).

Final step: Re-invest until you reach your goal

The secret ingredient to the share market is to re-invest your dividends into buying more shares. The best strategy may not actually be utilising the available dividend re-investment plans, but take the dividends as cash and put them to work in your favourite investment choice at the time.

If your portfolio has a grossed-up dividend yield of approximately 6% then it would take a portfolio of around $1.66 million to hit the $100,000 annual dividend goal. That’s a lot of money, I didn’t say it would be easy! However, if you start with $0 and invest $1,000 a month which compounds at 10% a year, it would only take 27 years to make your $100,000 yearly dividend goal dream come true. A 20 year old could hit the income goal before the age of 50! Wouldn’t that be great?

It is very possible to invest more than $1,000 a month or generate investment returns better than 10% a year, which would bring you to your goal faster.

If you want to make investment returns of more than 10% a year then these ASX shares could be precisely what your portfolio needs.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Bapcor, COSTA GRP FPO, and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia has recommended 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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