Looking for a source of passive income? ASX dividend shares are one of the best places to go.
Most shares listed on the ASX will provide you with income. But this doesn't just come in the form of dividends. So today, let's discuss three ways ASX shares can pay you a second income stream.
3 ways you can get paid passive income from ASX shares
Dividends
Let's get the obvious one out of the way. Most large shares on the ASX pay their shareholders dividends. These usually come every six months. Dividends are a portion of a company's profits that its management decides to give to shareholders.
A company's dividend is never guaranteed, and companies decide how much each payment will be every six months (or whether there will be a payment at all). But the best ASX shares tend to raise their dividend payments over time too, so if you find a winner, it can pay you passive income for your entire life.
Franking credits
The oft-overlooked companion of dividend payments, franking credits provide income to investors as well. Now, most investors who haven't retired will only be able to access this income in the form of the tax credits that franking provides. In essence, franking allows most investors to deduct their value from their other income come tax time.
So while you won't see this passive income in your bank account from the franking itself, you will get a bigger tax return than you otherwise would. But for retirees who have a low level of taxable income, it's possible to receive an actual cash refund from your franking.
Capital gains
This one is an interesting concept. Good quality shares go up most of the time. That means it's possible to occasionally sell some and profit from the passive income this provides, while still maintaining your capital base.
To illustrate, a broad-based ASX index fund like the Vanguard Australian Shares Index ETF (ASX: VAS) has returned a historical average of 8.95% per annum since its inception in 2009 (including dividend returns).
If an investor sold 2% of their Vanguard investment every year, it has the potential of providing a meaningful income stream without erasing all of the gains the investment is producing,
