Do you have your sights on becoming a millionaire? It's a very possible achievement for those invested in ASX dividend shares.
Though, it will likely take time. The stock market – like most other investment vehicles – is rarely an overnight millionaire-maker.
Here's how I'd aim to build a $1 million portfolio by drip-feeding $500 a month into ASX dividend shares.
Building wealth over time
The S&P/ASX All Ordinaries Index (ASX: XAO) has returned 4.6% annually over the last 10 years, according to data from S&P Dow Jones Indices.
At that rate, it would take around 50 years for a $500 monthly contribution to become a million. Though, past performance isn't an indication of future performance.
Of course, that's likely better than simply putting $500 of cash into a draw each month – in which case it would take more than a lifetime to save $1 million.
However, I'd like to expedite my path to becoming a millionaire. And I'd use ASX dividend shares to do so.
I'd aim to speed up the process with ASX dividend shares
ASX shares at home on the All Ordinaries boasted an indicative dividend yield of 4.32% as of 31 January, according to S&P Dow Jones Indices.
At that rate, our $500 monthly investment – $6,000 annually – could yield $259.20 of passive income by this time next year.
But I would shoot a little higher. I also wouldn't take my dividends as spending money.
I would aim to build a portfolio of ASX shares capable of providing an average 7% dividend yield and compound any and all payouts. That means using my dividends to buy more shares.
Buying individual shares rather than, say, an exchange-traded fund (ETF) tracking an ASX index carries more risk. But I personally think the potential rewards could be worth it.
By reinvesting my dividends, I could turn my $500 a month into $1 million in just 38 years, assuming a consistent 7% dividend yield.
And that's before any potential share price gains or tax benefits from franking credits.
Managing risk
As I mentioned above, stock picking can house greater risk than other investment styles. A large part of that is due to the instant diversification that comes with buying an index-tracking-ETF, for instance.
Thus, I would make a point to build a diverse portfolio, incorporating shares of various shapes and sizes, from various sectors.
Though, I would also focus on buying quality shares.
What makes a share good quality is subjective. I personally think quality companies boast strong balance sheets, leadership, and competitive advantages, for a start.
