Passive income has become a bit of a cliché, buzzword phrase these days. If you type it into YouTube or Google, you will get millions of people trying to tell you how to achieve it and retire early FIRE style.
And it will probably be through a method that sounds so easy you might even feel silly that you're not doing it already (dropshipping anyone?).
But here's the reality – there are only a few forms of passive income that I think pass the 'test of time' trial. Royalties, rental income and dividend income amongst them.
I personally would love to compose a chart-topping song or write a best-seller book.
But alas, it's easier said than done.
That's why I think ASX dividend shares are the best way to really achieve a stream of passive income. Literally almost anyone can buy a dividend-paying share (as long as they have at least some money to spare).
And all it takes is one share for the income to start flowing (albeit not very quickly).
How dividend shares can help you retire early
I'm not going to sugar-coat it: building up a stream of dividends that can replace your salary is not easy and cannot happen overnight.
But it is certainly possible.
Let's take a popular dividend share like Commonwealth Bank of Australia (ASX: CBA). Right now, Commonwealth Bank shares are offering a yield of 4.86%. That means that you can reasonably expect to exchange $100 today in return for $4.86 (or $6.94 including the franking credits) in passive income per year in perpetuity (we're assuming of course that CommBank at least maintains this payout/franking for the foreseeable future).
So from CBA shares alone, you would need to buy $1 million worth to get an income stream of roughly $70,000 per year (assuming you can get the benefits of franking).
That does seem like quite a lot of money (of course, it is!).
But here's the trick: many companies pay dividends but also raise them every year. If you bought shares of CSL Limited (ASX: CSL) back in 2013, you would be receiving a dividend yield on cost today of almost 5%.
That's despite new buyers only getting a yield of 0.68% today on current prices.
This is only possible because CSL (unlike CBA) has been consistently raising its dividend payments over the past few years – and looks set to continue doing so.
By finding these dividend growth companies, you can cut down the amount you need to invest and shorten your journey towards financial freedom.
