Want to create a secondary source of income to potentially retire off? Well, ASX shares are a great place to start. Many shares pay their ASX investors dividends. Dividends are passive income in the truest sense, arriving in your bank account whether you are young or old, sick or healthy, working or retired.
But creating an income stream that pays you $500 every month is no easy feat. So let's talk about how ASX shares can get you there.
Here's how ASX dividends can give you a second income
So let's start with the basics. $500 a month equates to an annual income of $6,000.
That means to hit $6,000 in annual dividend income, one will need $100,000 invested in an ASX share paying a 6% dividend yield. Or else $200,000 in an ASX share yielding 3% (and so on).
Luckily, most ASX 200 shares fit this bill, coming in somewhere between those metrics. In fact, one of the oldest index funds on the ASX gives us a good indication. Index funds are investments that reflect the broad performance of a share market.
Here in Australia, the S&P/ASX 200 Index (ASX: XJO) is typically used as a benchmark. The ASX 200 contains the 200 largest companies listed in Australia, ordered and weighted by market capitalisation (or sheer size).
The SPDR S&P/ASX 200 Fund (ASX: STW) is one of the oldest index funds on our share market. This exchange-traded fund (ETF) holds all 200 shares in the ASX 200 Index.
Since its inception in 2001, this ETF has returned an average of 7.86% per annum. That 7.86% can be broken down into 3.19% per annum in capital gains, and 4.67% per annum in dividend income.
If that average holds, you would need approximately $129,000 invested into this index fund if you wish to receive $6,000 in dividend income every year ($500 a month).
That might sound like a lot of money (and it is). But If you invested $500 a month every month, and reinvested your dividends, you would get to $129,000 in just under 13 years. If you doubled that to $1,000 a month, you would hit $129,000 in just under eight years. This is why ASX investors say you have to spend money to make money.
So achieving a sustainable secondary income from ASX shares is very doable. You just need time, discipline and regular investments.
