How does $3,000 of monthly passive income sound? If you're anything like me, you'd answer 'appealing'. That's why I've come up with a plan to build such an income stream by investing in S&P/ASX 200 Index (ASX: XJO) dividend shares.
Aussie stocks offer notably attractive dividend yields. I reckon that by buying a handful of the bourse's average performers – or an exchange-traded fund (ETF) offering diverse exposure – I could realise such an income stream in just a few decades. And it wouldn't take a huge nest egg to get started.
Creating – strategy
The first step I'd take on my passive income journey is perhaps the least exciting – budgeting. By creating a budget, I can easily identify what I spend on, where I could cut down on my spending, and how much spare cash I could use to better my financial position every month.
From there, I'd use my spare cash to pay down any high-interest loans and build a small financial safety net. Then, and only then, would I consider buying ASX 200 shares for passive income.
Building a portfolio of ASX 200 dividend shares
Let's say I found I could easily invest $750 every month.
I reckon that by doing so consistently, starting at age 40, I could boast $3,000 of monthly passive income by the time I reach the Australian retirement age.
What would be my secret weapon? Compounding.
As of the end of April, the average ASX 200 share could pay out 4.61% of its value in the form of dividends each year, according to S&P Global data. That figure is known as a dividend yield.
If I could invest $750 a month, realise a consistent 4.61% yield, and reinvest all the dividends I receive in that time, I think my portfolio could compound to be worth close to $410,000 in 25 years time, before considering any potential share price gains. Take a look:
| Years | Amount invested | Portfolio value |
| 1 | $9,000 | $9,785 |
| 5 | $45,000 | $50,284 |
| 10 | $90,000 | $112,339 |
| 15 | $135,000 | $190,077 |
| 20 | $180,000 | $287,465 |
| 25 | $225,000 | $409,468 |
Of course, that hinges on receiving a 4.61% dividend yield – a factor I can't guarantee. Further, my sums fail to consider costs like brokerage fees or any potential tax implications.
However, I don't believe such costs would eat into my returns at such a rate to make my strategy undeserving.
Realising $3,000 of monthly passive income
So, I've built a near-$410,000 portfolio of ASX 200 shares – how do I realise $3,000 of monthly passive income?
Well, there are two strategies I might consider. The first is simply living off dividend income.
A $410,000 portfolio with a 4.61% yield could bring in $18,900 of dividends each year – or $1,575 a month. If I reshuffled my investments into higher-yielding stocks, however, I might earn more passive income.
For instance, $410,000 invested equally across ASX 200 shares Whitehaven Coal Ltd (ASX: WHC) and Harvey Normal Holdings Ltd (ASX: HVN) could bring in $38,100 of annual dividends right now, or $3,174 of monthly passive income.
The stocks boast respective dividend yields of 10.25% and 8.33% at the time of writing.
Another passive income strategy I could consider is the 4% rule. It assumes a portfolio will grow at around 4% each year.
Thus, an investor could theoretically withdraw 4% of their portfolio each year – equating to $16,400 a year, or $1,370 a month, for a $410,000 portfolio.
Though, past performance isn't an indication of future performance, and no investment is guaranteed to provide returns or protection against downturns.
