Looking to make passive income? ASX shares are one of the best ways to do it. Dividends that investors receive from shares are truly passive income. Dividend payments simply flow through to anyone who owns the shares of the company paying the dividend. No other questions asked.
If a company pays consistent dividends, the cash arrives in your bank account every six months (or more frequently, if you're lucky) whether you are working or not, whether you are young or old, or sick or healthy.
What's more, you can start your passive income stream with as little as $50 a week.
Now most ASX brokers charge brokerage costs on any share transaction. So depending on what your preferred broker charges you in brokerage, it might be worthwhile investing $200 every month, rather than $50 a week.
But we'll still use that as a benchmark.
ASX shares and dividends
Well, unless you hit the jackpot on selecting your shares, it will take time to build up a solid passive income from ASX shares.
Let's take a broad index fund to illustrate. The iShares Core S&P/ASX 200 ETF (ASX: IOZ) is an exchange-traded fund (ETF) that holds the largest 200 shares listed on the ASX in one simple fund.
That's everything from Commonwealth Bank of Australia (ASX: CBA), Telstra Group Ltd (ASX: TLS) and BHP Group Ltd (ASX: BHP) to Coles Group Ltd (ASX: COL), Harvey Norman Holdings Limited (ASX: HVN), and Qantas Airways Limited (ASX: QAN).
The way an ETF works is that if a company it holds in its portfolio pays out a dividend, that cash is passed straight through to that ETF's investors. Thus, it's something of a representation of all income that comes out of the Australian share market.
So over the past 12 months, the iShares ASX 200 ETF has paid out a total of $1.78 in dividend distributions per unit (shares of ETFs are called units). On the current unit price of $28.88 (at the time of writing), this means that this ETF is currently offering a trailing dividend distribution yield of 6.16%.
So how much passive income will investing $50 a week get you?
So let's assume that we start investing $50 a week into this ETF from today. In a year's time, we will have approximately $2,600 invested into the iShares ASX 200 ETF.
If this ETF pays out the same level of dividend distributions over the next 12 months as it has over the past 12, we will receive a total of $160.16 in dividend income.
Now that might not sound like much. But investing takes time and (of course) cash. Say our investor continued to invest $50 a week into this ETF over 10 years. After that 10 years, we would have a total of $26,000 invested, yielding $1,601.60 per year in passive income.
This would be even higher if our investor prudently reinvested their dividend distributions into even more units of the ETF, rather than spending it.
ASX shares also tend to increase their dividends over time. If the iShares ASX 200 ETF increases its dividend distributions by 50% over those 10 years to $2.67 per unit, we would be receiving a total of $2,402.40 in passive income.
All of these amounts can be further boosted by additional investments too.
Creating a meaningful stream of passive income from ASX shares takes time and money. But if you make it a consistent habit over a long period of time, the results can start to become very rewarding.
