Lots of Aussies rely on their salary to bring in the cash flow to fund their household expenditure. But ASX shares could be the ticket to unlocking a monthly second income of $500 through dividends. How good would that be?
It may be an obvious thing to say, but the more that someone earns in wages, the more they're able to invest.
Certainly, how much someone is in a position to invest may look different for each household.
Saving 15% could mean putting aside $500 a month for one person, which is a solid amount of savings.
But for someone else, saving 15% could mean being able to put $3,000 into ASX shares every month.
Second income of $500 per month
Over the long term, compounding can generate significant wealth generation.
The ASX share market has managed to achieve an average return per annum of around 10%. This could double someone's money in around eight years.
If someone saved $500 a month and invested it into ASX shares which grew at an average of 10% per year, it would reach $95,600 after ten years, $190,600 after 15 years, and $343,600 after 20 years.
The numbers grow a lot quicker for someone investing $3,000 a month. After ten years, someone might have $573,747; in 15 years it could grow to $1.14 million, and after 20 years this could be $2.06 million.
Readers can play around with this excellent compound calculator to figure out how much their monthly investment number would grow.
$500 of monthly passive income
Knowing how much you need to have invested for $500 of monthly passive income comes down to the dividend yield.
If we think of $500 per month as an annual dividend, that's $6,000 which can then be divided into a monthly amount.
If the person investing $500 per month ends up with a $95,600 portfolio then investors would need to have a dividend yield of 6.3% if they wanted $6,000 per year. There are plenty of ASX dividend shares that have a dividend yield of more than that, such as Adairs Ltd (ASX: ADH) and GQG Partners Inc (ASX: GQG).
An investment total of $190,600 would mean investors only need to target a dividend yield of 3.1%. I think there are plenty of solid ASX dividend shares that have records of dividend reliability with a grossed-up dividend yield that's not too far from that, such as Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) and Sonic Healthcare Ltd (ASX: SHL).
Foolish takeaway
I believe it's possible for most households to build a solid second income thanks to ASX dividend shares, though it's a bit trickier at the moment with inflation and higher interest rates.
But, compounding can do a lot of the wealth-building work.
