Investing in ASX shares to grow and build a passive income is a great way to reduce the hours you need to work. By initially growing an ASX share portfolio and then converting it to generate income means you could be working part-time sooner than you thought.
The basic idea
In November 2019, the Australian Bureau of Statistics found that an employee’s average weekly total earnings was $1,256.20. Rounding this slightly we will work with an average annual income of $65,000. Meaning, to work part-time we would need to offset around half of this, or $32,500.
The basic idea is to initially invest consistently in growth-orientated shares. Building a large enough portfolio which can then be focused on dividend shares to generate a passive income of $32,500.
When chasing an income from ASX shares, I believe it pays to be prudent. This means not just choosing the shares with the highest yields, but instead looking into the future to see how sustainable those yields are. For this reason, despite a number of shares offering dividend yields of up to 10%, I believe a more reliable and achievable yield would be around 5% to 7% when we consider franking credits. So let’s take the middle ground and base our calculations on a 6% dividend yield for the portfolio.
This means, in order to generate $32,500 from a yield of 6%, we would need to grow a starting portfolio of $541,667.
Growing your portfolio
This is where the journey begins.
Growing a portfolio to $541,667 may initially sound a little like a fantasy. However, you may be surprised how quickly this could be achieved through consistent investing.
In fact, if you were to invest just $1,000 a month and earn a market average return of roughly 10% per year, it would take just over 17 years to amass $541,667.
However, if you do your research well (and dare I say with a little luck) and manage to invest in growth companies which outperform the market, you could be working part-time much, much sooner. For example, if you had made investments into companies such as Altium Limited (ASX: ALU), A2 Milk Company Ltd (ASX: A2M) or even Macquarie Group Ltd (ASX: MQG) you would have significantly reduced the growing time.
Earning income from your portfolio
Once your portfolio has reached its capital goal ($541,667 in our average example) it will be time to slowly alter its holdings to dividend-focused shares. You may even have found that some of your growth shares are now paying meaningful dividends and can remain in the portfolio. However, to achieve your average 6% dividend return you will likely need to sell some of your growth shares and invest that capital into reliable dividend payers.
A few great ASX shares I would suggest to look at today when building an income-focused portfolio are Washington H. Soul Pattinson and Co. Ltd (ASX: SOL), Rural Funds Group (ASX: RFF), Dicker Data Ltd (ASX: DDR), and Vanguard Australian Shares High Yield ETF (ASX: VHY).
Finding the right combination of shares to achieve your desired income may be a little tricky at first. Additionally, the income from your portfolio will be ‘lumpy’ as most companies pay dividends twice a year. However, over time and by choosing the right dividend shares, your income will also hopefully grow.
It may sound like a lot to take in. But, remember, this is the big picture. A great way to start will be by breaking it down into your monthly investments.
Where to invest $1,000 right now
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*Returns as of June 30th
Motley Fool contributor Michael Tonon owns shares of Macquarie Group Limited, RURALFUNDS STAPLED, and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia owns shares of and has recommended Dicker Data Limited, Macquarie Group Limited, RURALFUNDS STAPLED, and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia owns shares of A2 Milk and Altium. 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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