How to generate a passive income of $50,000 with ASX shares

If you want to become wealthy, investments in companies like Domino's Pizza Enterprises Ltd (ASX:DMP) could be worth considering…

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If you're wanting to generate an income of $50,000 per year from dividends, you'll need either time or a large amount of money.

If you have the latter, you could buy the shares of companies such as Sydney Airport Holdings Pty Ltd (ASX: SYD) or Telstra Corporation Ltd (ASX: TLS).

In respect to Telstra, I'm optimistic that a shift to a free cash flow-based dividend policy will allow the telco giant to maintain its 16 cents per share fully franked dividend in FY 2021.

This is a view that I share with Credit Suisse, which late last month put an outperform rating and $3.85 price target on the Telstra share price.

It expects Telstra to continue paying 16 cents per share over the near term, which will yield 5.8% for investors that buy in now.

This means that an investment of $862,000 into Telstra's shares would generate $50,000 of dividends each year.

Though, it is worth noting that investing such a large sum into a single share wouldn't be wise – don't put all your eggs in one basket springs to mind here. So, investors ought to look to build a diversified portfolio with shares offering similar yields to generate an income of this level through this method.

If you have time on your side.

If you have time on your side, then you might want to start thinking about investing for the future.

By investing in companies with solid long term growth potential that pay dividends, investors can build up a significant income portfolio over the long term.

A great example of this is pizza chain operator Domino's Pizza Enterprises Ltd (ASX: DMP).

In May of 2005, Domino's undertook its IPO and raised $75 million through the offer of approximately 34 million shares at $2.20 each.

Just over 15 years later the Domino's share price is changing hands for $80.60 and is tipped to pay a dividend of ~$1.43 in FY 2021.

This means that investors that bought Domino's shares at its IPO, and held onto them until today, will receive a yield on cost of 65%. To put that into context, for every dollar you invested in 2005, Domino's will be giving you 65 cents back in dividends over the next 12 months.

In light of this, an investment of ~$76,900 at its IPO would now be generating $50,000 in dividends this year.

But it doesn't stop there. Investing $76,900 into the Domino's IPO would have got you 34,954 shares. Today, those shares would have a market value of approximately $2.82 million.

So, not only are you receiving $50,000 (and growing) of dividends each year, you have a significant little nest egg that you could cash in later in life.

Overall, I think this demonstrates just how rewarding it can be to invest in ASX shares with a long term view.

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Telstra Limited. The Motley Fool Australia has recommended Domino's Pizza Enterprises Limited. 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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