Gaining a second income from ASX shares is a relatively easy concept to get one's head around. Many ASX shares pay dividends. Dividends are cash payments made to the shareholders of the company, from the company. They can be an important source of income for anyone seeking passive cash flow.
But getting to a point where ASX shares can pay you a yearly income of $20,570 or more is the hard part.
Let's take an ASX index fund like the Vanguard Australian Shares Index ETF (ASX: VAS). This exchange-traded fund (ETF) holds a broad swathe of the Australian share market, investing in the largest 300 shares listed on the ASX.
That's everything from Commonwealth Bank of Australia (ASX: CBA) to Telstra Group Ltd (ASX: TLS) and Harvey Norman Holdings Limited (ASX: HVN).
This index fund holds dozens and dozens of dividend-paying shares. As such, it can pass any dividends it receives straight through to its investors.
Over the past 12 months, this ETF has paid out a total of $6.26 in dividend distributions per unit. At the current pricing, that gives this fund a trailing distribution yield of 7.04%.
So say that an investor bought this ETF at the current pricing a year ago. They would have received just over $7 in passive income for every $100 invested.
But how much would said investor need to have in this ETF to gain a second income of $20,570 over the past 12 months?
How long does it take to build a second income from ASX shares?
At that 7% yield, it would have taken a lump sum of just over $292,200 to generate $20,570 in passive dividend income.
Now, that might seem like a lot (and it is). But here's how consistent investing could get you there.
The Vanguard Australian Shares Index ETF has generated an average return of 9.21% per annum since its inception back in 2009. That's assuming all dividend distributions are reinvested.
So let's assume this rate of return continues (which is never guaranteed). At this return, an investor would get to $292,200 if they invested $1,000 per month for just over 13 years. And reinvested all dividend distributions, of course.
If our investor was able to up the ante and invest $1,500 per month, this would cut our timeframe down to 10 years. Then, you can stop reinvesting those dividends and hopefully enjoy at least $20,570 every year in passive income.
Gaining a second income from ASX shares takes a lot of time, money, and discipline. But it can be done.
