How I'd invest $300 a month in ASX shares to target an extra income of $20,000 per year

Growing a passive income from the share market is something that anyone can do…

A businesswoman weighs up the stack of cash she receives, with the pile in one hand significantly more than the other hand.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Key points

  • Having a second income without having to lift a finger is possible with ASX shares
  • Even by investing relatively modest amounts each month you can get there
  • I would invest in high quality shares consistently to reach my goal

Building a passive income from ASX shares is something that anyone can do.

And while it doesn't happen overnight, if you're both disciplined and patient, generating a $20,000 second income from ASX shares is very achievable, even by making modest investments, thanks to compounding.

Getting started

Firstly, in order to get a $20,000 a year paycheck from the share market, you're going to have to build your portfolio to a size that yields this amount in dividends.

Given that many banks like Westpac Banking Corp (ASX: WBC) and high-yield ASX ETFs offer 6% yields for investors, we'll base our calculations on that.

To be paid $20,000 of dividends each year when earning a 6% dividend yield, you'll need a portfolio of ASX shares valued at approximately $330,000.

When you're starting out, that might seem like an unattainable goal, but I don't believe it is. Once again, it's all about patience and discipline.

Over the long term, share markets have provided investors with an average annual return of 10%. Unfortunately, I cannot guarantee that this will be the case in the future, but I would be disappointed if future share market returns are not in line with historical levels.

If you're able to invest $300 a month into high-quality ASX shares and generate a 10% average annual return, your portfolio will have grown to be worth $335,000 in 24 years.

At that point, you could switch your focus to income and build a diversified portfolio filled with ASX shares offering dividend yields averaging 6%. Doing so would give you a $20,000 second income without having to lift a finger.

Speedier options

Investors who are able to put a little bit extra into their monthly investments will get there even quicker.

For example, investing $500 would grow your portfolio to the required size after a little over 19 years.

Can stretch your budget further? Well, $750 would take a touch over 15 years to hit our goal.

Which ASX shares should you buy?

I would focus on buying ASX shares with strong business models, excellent management teams, competitive advantages, and positive growth outlooks.

Companies such as CSL Limited (ASX: CSL), Domino's Pizza Enterprises Ltd (ASX: DMP), and Goodman Group (ASX: GMG) tick a lot of these boxes for me.

Alternatively, you could take the easy option and buy index-tracking ETFs like Betashares Nasdaq 100 ETF (ASX: NDQ) or Vanguard Australian Shares Index ETF (ASX: VAS). These funds aim to provide you with the return of the respective index before fees.

Motley Fool contributor James Mickleboro has positions in BetaShares Nasdaq 100 ETF, CSL, Domino's Pizza Enterprises, and Westpac Banking. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended BetaShares Nasdaq 100 ETF, CSL, and Domino's Pizza Enterprises. The Motley Fool Australia has positions in and has recommended BetaShares Nasdaq 100 ETF. The Motley Fool Australia has recommended Domino's Pizza Enterprises, Goodman Group, and Westpac Banking. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on How to invest

A couple sits in their lounge room with a large piggy bank on the coffee table. They smile while the male partner feeds some money into the slot while the female partner looks on with an iPad style device in her hands as though they are budgeting.
How to invest

Where to invest $8,000 in April 2024

Here's what sort of returns could be on offer from these ASX shares according to analysts.

Read more »

An ASX dividend investor lies back in a deck chair with his hands behind his head on a quiet and beautiful beach with blue sky and water in the background.
How to invest

Shares vs. property: How to generate $500 passive income per month

We run the numbers.

Read more »

A woman holds a lightbulb in one hand and a wad of cash in the other
How to invest

ASX 200 shares vs term deposits: What $5,000 invested a year ago is worth now

Which has been the superior option for investors?

Read more »

Kid on a skateboard with cardboard wings soars along the road.
How to invest

Shares vs. property: Why cheaper homes and ASX small-cap shares are rising fastest in 2024

We look into the changing trends in shares vs. property.

Read more »

Smiling young parents with their daughter dream of success.
How to invest

2 ASX shares that could help set you up for life

Analysts are saying good things about these buy-rated shares.

Read more »

a man wearing casual clothes fans a selection of Australian banknotes over his chin with an excited, widemouthed expression on his face.
How to invest

$20,000 invested in these ASX 200 shares 10 years ago is worth how much?

Would you be laughing all the way to the bank today or not?

Read more »

Busy freeway and tollway at dusk
How to invest

If inflation rebounds I'll be buying this leading ASX 200 share

Inflation doesn’t impact all ASX 200 shares equally.

Read more »

Businessman working and using Digital Tablet new business project finance investment at coffee cafe.
How to invest

Forget term deposits and listen to Warren Buffett's advice with ASX shares

Are you missing out if you buy term deposits?

Read more »