I think that ASX dividend shares could be an excellent way for people to grow their passive income. Investing just $200 a month could eventually turn into $20,000 of annual income.
Now, don't get me wrong. Investing $2,400 in the first 12 months isn't suddenly going to unlock $20,000 of annual dividends. It will take some time, but I believe that it's possible.
Compounding is a very powerful financial force, which can enable smaller amounts to grow into much larger amounts. Albert Einstein once supposedly said:
Compound interest is the eighth wonder of the world. He who understands it, earns it…he who doesn't…pays it.
For example, using a compound interest calculator, investing $200 a month for 40 years, returning an average of 10% per annum, turns into $1.06 million. That only requires $96,000 of money from the investor – the rest (in this example) comes from compounding returns.
But, I don't think someone needs $1 million to make $20,000 of annual income. A portfolio with a yield of 4% would only need to be half the size ($500,000) to make $20,000, while a 6% yield would only need to be $333,334 in size to make $20,000.
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How I'd invest in ASX shares
There are a few principles that I'd take into this investing plan.
First, I'd take a brave attitude when it comes to market crashes. Volatility regularly happens. If I'm invested in good businesses, a temporary dip (even a big one) won't bother me. In fact, I would see lower prices as an opportunity to buy, rather than panic and sell. It's during those times that the best prices can be found.
Second, I would want to consistently invest, through the ups and downs into the best opportunities I could see with a dollar cost averaging (DCA) strategy. While share prices are always changing, I think there'll always be at least one idea that could be a good opportunity.
Third, I'd only invest in businesses that seem as though they have a good potential to grow earnings and dividends. I think it's the businesses that are growing their underlying value that have the best chance of achieving share price growth and good dividends over time.
For example, several years ago I invested in Altium Limited (ASX: ALU) shares when the dividend yield was more than 3%. Since then, the dividend (and profit) has grown enormously and my yield-on-coast is much higher. In 2014 it paid an annual dividend of 12 cents per share and in FY22 it paid an annual dividend of 47 cents per share.
Some of the names I believe can provide a good combination of dividends and growth in the coming years include Adairs Ltd (ASX: ADH), Premier Investments Limited (ASX: PMV), Beacon Lighting Group Ltd (ASX: BLX), Lovisa Holdings Ltd (ASX: LOV), Healthia Ltd (ASX: HLA), Bailador Technology Investments Ltd (ASX: BTI) and Propel Funeral Partners Ltd (ASX: PFP).
