The new year has dawned and with it has come new opportunities. What better time is there to revisit your investing goals? There are thousands of reasons to invest, but the major intensive is to build passive income.
Perhaps kicking back over the holiday period reminded you how much you enjoy living life and relaxing without having to worry about pay slips, meetings, or emails.
Fortunately, I have a $5 a day plan to build a secondary income in 2023. Here's how I might aim to put my money to work this year.
How I'd aim to turn $5 a day into a passive income this year
$5 a day might not sound like much. Indeed, it probably won't get you a strong latte in most Aussie cities.
However, such a small amount can add up over the weeks, months, and years to come. Particularly when we consider compounding.
$5 a day adds up to around $152 a month, or $1,825 a year.
Over 10 years, investing my daily pocket change could see me boasting an $18,250 portfolio – enough to provide $861.40 of annual dividend income, considering the SPDR S&P/ASX 200 (ASX: STW)'s current 4.72% dividend yield. The SPDR ASX 200 Fund is an exchange-traded fund (ETF) tracking the S&P/ASX 200 Index (ASX: XJO).
However, 2022's downturn has likely left some ASX 200 shares trading for bargain prices and, thereby, boasting decent dividend yields.
Thus, I might aim to build a portfolio boasting an average dividend yield of around 7% this year and compound my payouts into the future.
Taking advantage of 2022's downturn
But first, I'd pick a diverse handful of stocks I believe offer reliable dividends, advantages over their peers, and future earnings potential.
The latter is important as dividends are derived from a company's earnings. Therefore, I'll be keeping my eye out for consistent cash flows and a strong balance sheet.
Some stocks that might be on my radar include Super Retail Group Ltd (ASX: SUL), Rio Tinto Limited (ASX: RIO), Incitec Pivot Ltd (ASX: IPL), and JB Hi-Fi Limited (ASX: JBH).
The four ASX 200 shares currently offer an average dividend yield of around 7.3%.
At such levels, the figurative $1,825 portfolio I could boast at the end of this year after investing $5 a day could offer $133.20 of passive income.
But if I compounded my dividends…
However, I wouldn't take those dividends as cash. Instead, I would reinvest them into my passive income portfolio, thereby compounding my dividends.
Assuming I can continue to receive a 7.3% yield and my shares' value doesn't move, my portfolio could be worth $25,571 in 10 years thanks to the power of compounding. At that point, it would be capable of paying out $1,866 of dividend income each year.
Looking further into the future, in 20 years' time my portfolio could be worth $77,292 – which could pay out $5,642 annually at a 7.3% dividend yield.
That's certainly worth $5 a day, in my opinion.
