How I'd invest $200 per month in ASX shares to target a $51,000 second income

This is how I'd unlock huge cash flow.

Woman looks amazed and shocked as she looks at her laptop.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

ASX shares can be a very effective tool to build a second income for Australians looking to grow their earnings.

A lot of working Aussies get most of their taxable earnings from their main source of work, whether that's conducted at home, at the office, in a shop, at a construction site or anywhere else for that matter.

But we can only work so many hours. Even if we worked 10-hour days six days a week, there's an upper limit to what we can achieve with our time.

Wouldn't it be good if we could find a second income that can keep working while we're not?

Dividends are great

A lot of the larger companies on the ASX make a profit, with many of those deciding to pay a dividend to shareholders each year.

We can buy a small piece of those businesses by investing in ASX shares. As shareholders, we do not try to influence what decisions the CEO should make or what strategy a company should take. We can just be passive, backseat investors and benefit from the dividend payments and, hopefully, share price growth over time.

The first step to building a second income is to actually save some money and invest it in whatever ASX shares we decide are good options.

Imagine a company that pays a dividend yield of 4%. That means a $1,000 investment would generate $40 in dividends in year one.

If the business grows its earnings per share (EPS) by 10%, it could theoretically lead to a 10% rise in the dividend and perhaps deliver a 10% share price increase. Of course, it may not be as simple as that in real life, but this is an example of how things can work.

After one year, we'd have a 14% total return – that's the 10% share price growth and the 4% dividend yield.

Plus, the next year of dividend payments would equate to a 4.4% dividend yield on the cost of the shares after the 10% dividend increase by the business.

Aside from making the initial investment, I wouldn't have had to put any work myself into generating those dividends.

How I'd invest in ASX shares to make a second income

Many company management teams have the wonderful ability to deliver growth by investing in initiatives and re-investing profit back into the businesses.

I believe ASX shares that are capable of producing a mixture of dividends and good earnings growth could suit my investment income goal the most.

While names like ANZ Group Holdings Ltd (ASX: ANZ) and BHP Group Ltd (ASX: BHP) usually deliver impressive dividend yields, I'm not sure that their profit is going to grow at a strong compound annual growth rate (CAGR) because of their size and the nature of banking and mining.

I'm looking for good businesses that have plenty of room for growth, are among the best at what they do, generate good margins and have plans to keep becoming bigger.

Which ASX shares do I think can deliver good earnings and dividend growth over the rest of the 2020s and hopefully beyond? And are they currently at a good price?

Diversification is important, so I'll mention five names that could be a good place to start researching with a look at their investor presentations. They include:

Good exchange-traded funds (ETF) could also be effective at delivering returns, such as VanEck Morningstar Wide Moat ETF (ASX: MOAT) or VanEck MSCI International Quality ETF (ASX: QUAL).

Second income example

Let's imagine that we're starting off with savings of $5,000 and investing $200 per month into an (ASX) share portfolio that makes an annual return per annum of 10%. Assuming we re-invest the dividends, it could grow to be worth $931,000 in 35 years.

With a reasonable dividend yield of 5.5%, the portfolio could make $51,000 of a second income per year. That sounds great to me. Of course, we can start accessing our investment income in year one if we want extra cash flow earlier, though the long-term portfolio growth would be less.

Motley Fool contributor Tristan Harrison has positions in Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Johns Lyng Group, Lovisa, Washington H. Soul Pattinson and Company Limited, and Wesfarmers. The Motley Fool Australia has positions in and has recommended Washington H. Soul Pattinson and Company Limited and Wesfarmers. The Motley Fool Australia has recommended Johns Lyng Group, Lovisa, and VanEck Morningstar Wide Moat ETF. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Dividend Investing

A little girl holds on to her piggy bank, giving it a really big hug.

2 top ASX dividend stocks to buy and hold forever

Here are two companies I'd buy shares in to keep the income up instead of holding cash.

Read more »

Woman calculating dividends on calculator and working on a laptop.
Dividend Investing

Buy NAB and these ASX 200 dividend stocks

Analysts are saying good things about these income options.

Read more »

ETF written on cubes sitting on piles of coins.

The rise of dividend ETFs in Australia: A new era of investment

Dividend ETFs can be great, but make sure you watch out for these key indicators.

Read more »

Smiling woman holding Australian dollar notes in each hand, symbolising dividends.

2 ASX dividend stocks I'll be buying hand over fist in 2024

These two shares are on the top of my 2024 wish list.

Read more »

A senior investor wearing glasses sits at his desk and works on his ASX shares portfolio on his laptop2
Dividend Investing

3 ASX All Ords shares with ex-dividend dates next week

You'll need to get a wriggle on if you want to receive these dividends.

Read more »

Woman holding $50 notes and smiling.
Dividend Investing

3 ASX dividend stocks to solve your income needs

These dividend shares have been given the thumbs up by analysts.  

Read more »

A couple calculate their budget and finances at home using laptop and calculator.
Dividend Investing

Passive income: How much should you invest to earn $5,000 in annual ASX dividends

When it comes to passive income, I prefer ASX 200 shares with a reliable track record of making regular, fully…

Read more »

Man holding Australian dollar notes, symbolising dividends.
Dividend Investing

Which major ASX energy share will pay the best dividend yield in FY24?

And are ASX energy shares usurping mining and banking stocks when it comes to dividends?

Read more »