My $10-a-day approach to building a second income with ASX shares

Creating a long-term passive income doesn't have to break the bank.

| More on:
A woman looks quizzical while looking at a dollar sign in the air.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Key points

  • Putting aside just $10 a day to invest can prove a powerful wealth building habit
  • Indeed, it adds up to $3,650 a year – more than enough to invest in quality ASX dividend shares
  • Identifying quality stocks can be as simple as sussing out a company's long-term profit potential and considering if it's trading at reasonable value

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.

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.

Motley Fool contributor Brooke Cooper has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Ansell. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on How to invest

Smiling woman upside down on a swing with yellow glasses, symbolising passive income.
Dividend Investing

$20,000 in savings? Here's how I'd aim for $20,000 in passive income

Here’s how I’d target $20,000 in passive income every year from ASX shares by investing $20,000 today.

Read more »

bull market encapsulated by bull running up a rising stock market price
How to invest

A bull market could be coming in 2024. Here's Warren Buffett's investing advice to help you cash in on it

Warren Buffett officially became a billionaire at age 56; today he’s worth some US$137 billion!

Read more »

a smiling picture of legendary US investment guru Warren Buffett.
How to invest

Here are Warren Buffett's tips to becoming rich with ASX shares

The Oracle of Omaha's latest letter to shareholders was filled with great advice.

Read more »

Happy couple at Bank ATM machine.
How to invest

How to generate $50,000 of passive income from ASX shares each year

Here's how to make the share market your own personal ATM.

Read more »

A woman in hammock with headphones on enjoying life which symbolises passive income.
How to invest

3 ASX 100 and ASX 200 shares I'd buy now for a $1,820 passive income in 2024!

These three ASX dividend shares offer investors market beating passive income.

Read more »

Legendary share market investing expert and owner of Berkshire Hathaway Warren Buffett
How to invest

No savings in 2024? I'd follow Warren Buffett and start building wealth

Don't let having no savings hold you back from becoming wealthy.

Read more »

Woman laying with $100 notes around her, symbolising dividends.
How to invest

How long would it take to turn $20,000 into $100,000 with ASX dividend stocks

It may not take as long as you would expect.

Read more »

posh and rich billionaire couple
How to invest

5 steps to becoming a milionaire with ASX shares

Could following these step make you very wealthy in the future?

Read more »