Considering starting a side hustle or putting in overtime for extra cash? You're not alone. However, I'd prefer my second income to be passive – and ASX dividend shares can help me build it.
Here's how I'd approach investing on the ASX with $10 a day and a goal to create a long-term income stream.
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Turning $10 a day into a second income
Putting aside $10 a day is a powerful wealth-building habit. Over the course of a year, a daily $10 saving grows to become a $3,650 next egg.
That's more than enough to kick-start my plan to create a second income.
Identifying ASX dividend shares to buy
Step two is likely to be the most daunting for new investors – buying ASX dividend shares. But it needn't be difficult or confusing.
Shares are basically a piece of a company, and dividends are essentially spare cash that that company hands out to its investors.
So, if I were searching for dividend shares, I would be looking for a company that has the potential to earn consistent profits now and into the future.
And that means I'd be looking for a company (or companies) that offer in-demand products or services and boast competitive advantages over their peers.
For instance, people have to eat. As a result, demand for supermarkets will always exist. So, Woolworths Group Ltd (ASX: WOW) probably won't struggle for revenue any time soon.
Another example: those working in the healthcare industry will always need protective gloves. As a result, glove manufacturer and supplier Ansell Limited (ASX: ANN) will likely always realise an income.
I'd also take a good look at a company's balance sheet. If it has substantial debts, I'd likely assume a fair chunk of its revenue will go towards servicing loans instead of into the pockets of shareholders.
Valuing dividend champions
But finding a business capable of long-term profits isn't enough. I'd also want to buy it at a decent price.
Buying shares in a good company for more than they're worth can make for a bad investment.
Not to mention the cheaper one buys a quality company, the better the dividend yield can be expected to be. A company's dividend yield compares its share price against the amount it pays out annually.
There are plenty of ways to determine if a company is trading at an attractive price. Some simple methods include working out its price-to-earnings (P/E) ratio or price-to-book (P/B) ratio. All the information one needs to calculate these ratios can be found in a company's financial reports.
Growing my second income
If I were to invest $3,650 in ASX shares capable of providing a healthy 5% dividend yield, I could realise $182.50 of passive income in my first year.
That's probably nothing to write home about. However, by consistently setting aside $10 a day to invest, I would expect the passive income offered by my portfolio to grow alongside its value.
And if I didn't need the extra cash, I'd use it to buy more shares. That way I could compound any gains I realise.
Though, it's important to remember that there will most likely be some bumps in my wealth-building road. The market is prone to downturns, corrections, and even crashes, but it has always historically gone up.
Still, no investment is guaranteed to provide returns.
