How to turn a $20k ASX share portfolio into $15,000 yearly second income

Fancy scoring a five-figure boost to your annual pay packet?

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Do you have $20,000 saved that you could invest in ASX shares?

If so, I reckon you could turn it into a portfolio that pays you an extra income of $15,000 each year.

It's like having a second job, but without the work.

Let's take a look at some examples of how you could achieve that:

First, plough it into growth stars 

Initially, this $20,000 nest egg needs to become larger before it's in a position to pay you a decent second income.

One way to expand capital using ASX stocks is to construct a portfolio of growth shares.

Some examples of those that multiple experts are counting as buys currently are Life360 Inc (ASX: 360), Audinate Group Ltd (ASX: AD8), and Telix Pharmaceuticals Ltd (ASX: TLX).

All three — playing in varied sectors — have had a fantastic 2023, with their share prices rocketing 72%, 67%, and 40% year to date.

But more importantly, they have positive long-term growth potential.

Diversification is critical to reduce risk, so let's say you bought a basket of such stocks with your $20,000.

The past is no indicator of future performance, but let's use some historical numbers just to demonstrate the power of compounding.

For our calculations, we'll assume your portfolio performs similarly to the popular Vaneck Morningstar Wide Moat ETF (ASX: MOAT), which has gained in excess of 80% over the past five years.

That works out to be a compound annual growth rate (CAGR) of 12.47%.

If you can chip in $200 each month, your $20,000 will have grown to a massive $123,709 after just 11 years.

Well done, we're almost there.

Then start skimming off the winnings

Now the investment is ready to give out some passive income.

But how do we extract it?

The first way is to simply sell off and pocket whatever gains come about each year.

If that portfolio can continue to average 12.47% each year, that's $15,426 of second income for you. 

Mission accomplished!

One caveat with this method is that capital growth can be volatile. While you might see an average of $15,000 each year, some years you may receive nothing and in others you might be paid a windfall.

An alternative income strategy

If you seek more certainty and consistency with the passive income flow, perhaps a different strategy could help.

Let's go back to that $123,709 portfolio. Now sell all those growth shares and freshly construct a diversified portfolio of ​​ASX dividend shares.

Income producers currently favoured by analysts including Viva Energy Group Ltd (ASX: VEA), South32 Ltd (ASX: S32), and Fletcher Building Ltd (ASX: FBU) could make a great foundation.

They are paying out dividend yields of 8.7% fully franked, 8.6% fully franked, and 8% unfranked at the moment.

Let's take the median of 8.6% as the returns that the entire portfolio could bring.

That will start bringing you $10,638 in second income. Not bad at all, and with potentially much less volatility than sticking with the growth stocks.

But if that's not quite enough passive income and you want to hit the $15,000 mark that the first method achieved, keep reinvesting the returns for five more years.

Then the nest egg will have expanded to $186,974.

From then on you can start pocketing a second income of $16,079.

While the cash flow will likely be more stable, the downside with this method is that selling all the growth shares could result in capital gains tax, depending on your personal circumstances.

Motley Fool contributor Tony Yoo has positions in Audinate Group, Life360, and Telix Pharmaceuticals. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has recommended Audinate Group and Life360. The Motley Fool Australia has recommended Audinate Group, Telix Pharmaceuticals, 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.

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