Many Australians think that thousands of dollars of passive income is a pie-in-sky dream that only rich folk achieve.
But believe it or not, it's well within reach of the ordinary punter.
But you have to have patience and discipline to follow a plan.
Here's one way you could get to $4,000 of passive income each year after putting aside $300 per month for investing:
Let's grow the nest egg first
Firstly, you need to grow your investment to a certain size before you're able to rake in a substantial amount of dividend income.
So in this first phase, you could target a growth stock so that the focus is on capital expansion.
I'm going to take New Zealand software company Xero Limited (ASX: XRO) as an example.
While the past should never be taken as an indicator of future performance, Xero shares have done pretty well over its history.
Over the last five years, the technology stock has gained an appetising 162%.
Before you say there is some timeframe bias, consider this.
Over that half-decade, Xero shares have been devastated by both the COVID-19 market crash and the great tech slump of 2022. In the latter, it lost over half its value from peak to trough.
Xero's five-year return works out to be a 21.24% compound annual growth rate (CAGR).
Let's say you bought $10,000 of Xero shares to start your portfolio.
This is not unrealistic, with National Australia Bank Ltd (ASX: NAB) research showing the typical Australian having about $34,500 of savings.
If you keep buying an additional $300 each month of Xero shares, and the nest egg grows by 20% each year, then after just four years you will hit $43,906.
Excellent work!
Now let's buy dividend shares
In order to get your hands on that stream of passive income, we now need to flip this lump sum into dividend shares.
I'll use Woodside Energy Group Ltd (ASX: WDS) as my example here. But if fossil fuel producers make you uneasy then there are plenty of alternatives on the ASX that will do the same job.
Anyway, Woodside shares pay out a handsome dividend yield of 10.8%.
With the world in a depressed economic state in the immediate future, I feel like demand for energy will head up in the long run. This should protect both the capital and the yield.
So if you buy Woodside shares using that $43,906 nest egg you built up, from then you will see $4,741 of passive income each year come into your bank account.
That's a nice holiday paid for every 12 months, without lifting a finger.
That wasn't so hard, was it?
