A couple of gold coins likely won't get you much these days. But I reckon with just $3 a day, I could build a portfolio of S&P/ASX 200 Index (ASX: XJO) shares capable of providing more than $300 of monthly dividend income.
And all it would take to execute my plan is consistency, time, and patience.
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How I'd turn $3 a day into $370 of monthly dividend income
Albert Einstein once called compound interest "the eighth wonder of the world". Indeed, it's a pretty incredible phenomenon.
Compounding, to put it simply, is realising gains on your gains. By realising small returns over a long period of time, wealth can compound to an astronomical extent.
By taking advantage of compounding, I believe I could turn $3 each day – or around $1,000 a year – into a reliable income by investing in ASX 200 dividend shares.
Let's do the math
The average ASX 200 share also offered a 4.61% dividend yield at the end of April, according to S&P Global data.
Of course, past performance isn't an indicator of future performance. But let's just assume the index will continue providing dividends at that same rate for the next 30 years.
By setting aside $3 a day and investing the resulting cash in ASX 200 shares once a year, also reinvesting all the dividends I receive in that time, I could boast a portfolio worth around $72,300 by the year 2043. That's not bad, considering I'd have invested just $32,850 in that time.
At that point, my figurative portfolio could be bringing in around $278 of dividend income a month – assuming my annual yield stays at 4.61%.
And that's also before considering any share price gains I might also realise.
The ASX 200 has boasted an annualised capital return of around 4.1% since April 2018. I reckon that could push my monthly dividend income way higher than my $300 target.
Though, these equations haven't considered a number of important factors, such as brokerage fees or tax. Not to mention, no investment is guaranteed to provide returns.
Still, the returns that can feasibly be realised from a consistent and long-term investing strategy are eye-opening.
What if you're not that into stock picking…
Of course, not every investor will have the time and patience to diligently build their portfolio from scratch. It's also worth noting that building a portfolio in small increments isn't likely conducive to diversification.
Fortunately, investing in exchange-traded funds (ETFs) like the Betashares Australia 200 ETF (ASX: A200) can provide exposure to the entire index with just one purchase.
