Turning an empty savings account into a $35,000 yearly second income with ASX shares!

ASX share investing can unlock appealing investment cash flow.

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Key points

  • The great thing about ASX shares is that they can deliver dividends and capital growth
  • We can use the power of compounding to help snowball our wealth
  • Buying a strong-performing ETF like VanEck MSCI International Quality ETF could do well for our portfolio

The ASX share market can be a great place to find investment opportunities that could unlock a yearly second income of $35,000.

People who have owned some of the ASX's best performers over the past decade have seen their dividends and portfolio value soar – I'm talking about names like Pilbara Minerals Ltd (ASX: PLS), Altium Limited (ASX: ALU), Northern Star Resources Ltd (ASX: NST) and Pro Medicus Ltd (ASX: PME). They are paying impressive dividend yields compared to their share prices from a decade ago.

After their very strong runs, I'm not about to say an investment in those above stocks today can create a $35,000 yearly second income from ASX shares (unless you have $2 million sitting there in cash ready to be invested).

However, I strongly believe that with a regular investment plan in good ASX shares, Aussies can make a great long-term return and receive a second income.

Compound to success

Albert Einstein once reportedly said:

Compound interest is the eighth wonder of the world. He who understands it, earns it… he who doesn't, pays it.

By using the power of compounding, we can build ample wealth for ourselves.

Using a compound calculator, if a share portfolio returns an average annual return of 10% and we invest $600 per month, it would grow into a value of $1.18 million after 30 years.

It's a bit tricky to identify today which ASX dividend shares are going to deliver strong growth and keep paying attractive dividends to create that second income several years from now. If I had to pick an ASX share that's already paying a good dividend and could grow strongly for at least a decade, it would be Lovisa Holdings Ltd (ASX: LOV), the affordable jewellery retailer.

Lovisa achieves attractive levels of profit from a typical store, and I think it's going to roll out hundreds of more stores in the coming years as it expands in places like North America, Asia and Europe. Between FY23 to FY25, the earnings per share (EPS) is projected to grow by 58%, and the annual dividend per share is expected to grow by 4.3%, according to Commsec numbers.

However, I don't think we should rely on a small number of ASX shares to deliver all the growth to reach a strong level of earnings.

A different strategy could be to invest in exchange-traded funds (ETFs) that seem capable of producing strong net returns, which we can then utilise.

ETF growth strategy

In the accumulation phase of wealth-building, I imagine a lot of investors are paying taxes because they are in one of the tax brackets, so it could make sense to go for capital growth over dividends. Capital gains are only taxed when the shares are sold.

When we've reached a certain wealth milestone, say, $1 million, we could decide to sell 3.5% of the portfolio to unlock a 3.5% 'yield', or we could sell most/all of the portfolio and switch to ASX dividend shares for a second income.

For example, one to consider is the VanEck MSCI International Quality ETF (ASX: QUAL). It's invested in a "diversified portfolio of quality international companies" that are listed around the world, outside of Australia. The 300 businesses in the portfolio all have a high return on equity (ROE), stable year-over-year earnings growth and low financial leverage.

Since the ETF's launch in October 2014, the QUAL ETF has delivered an average return per annum of 15.3%. In the past three years, it has delivered an average return per annum of 13.7%.

Past performance is not a guarantee of future results, but if we assumed a (more conservative) average return per annum of 12.5%, investing $600 per month would grow to $1.17 million in 26 years. That's four years quicker than my first example making 10% per annum.

We could then sell $35,000 of this total value per year and get a second income and perhaps still see the total value increase each year.

Motley Fool contributor Tristan Harrison has positions in Altium. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Altium, Lovisa, and Pro Medicus. The Motley Fool Australia has recommended Lovisa and Pro Medicus. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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