Fancy $55,000 of passive income each year?
For many Australians, that would allow them to work fewer hours or even quit their day job altogether.
How good would that be!
With the power of compounding and ASX shares, this is not such a crazy goal.
Let's explore some examples of how you could achieve this:
Here's how to start
Assuming you have $30,000 to invest is not an unrealistic scenario, with National Australia Bank Ltd (ASX: NAB) research finding this year that the average Australian has a bit more than that saved.
Now, we need to put this money to work by constructing a stock portfolio.
A great place to start, in my opinion, is to pick a well diversified batch of ASX growth shares.
That way, we can grow the capital as rapidly as possible to get it to a point where substantial passive income could be milked out of it.
Three such growth stocks that might do the job are Mader Group Ltd (ASX: MAD), Temple & Webster Group Ltd (ASX: TPW) and IDP Education Ltd (ASX: IEL).
The trio play in distinct industries — mining services, retail and education — ensuring diversification across economic cycles.
Buy up these types of shares and we're on our way.
Grow the nest egg
While past performance is never an indicator of the future, we need some numbers to see how, hypothetically, we can achieve our passive income dream.
The Mader Group share price has rocketed an amazing 590% over the last five years. Temple & Webster is not far behind, now trading about 560% higher than it did in 2018.
IDP is a bit behind those, but still returned 130% in that period.
If we're being conservative with our calculations and assume our portfolio grows at the rate of the IDP share price, we're looking at a compound annual growth rate (CAGR) of 18.13%.
So starting with that $30,000 portfolio and adding $350 each month to it, the pot will expand to $309,000 after just 11 years.
Nice work!
How do we get passive income out of it?
Now we're ready to harvest that sweet passive income.
There are many ways one could do this, but I'll present you with two methods.
The first is easy. Just leave the portfolio as it is, and each year sell off the gains from the preceding 12 months.
If the CAGR of 18.13% could be maintained, that's $56,000 coming into your bank account every year for as long as you want it.
One warning is that while this route is easy to drive, it is volatile.
As we all know, share markets can fluctuate up and down in the short term. This means that while you might see an average of $56,000 each year, some years you could see nothing.
The second method requires more work, but could result in more consistent passive income.
Going back to that $309,000 portfolio, let it brew for another four years without selling off the gains. Now that nest egg will be $624,000.
From there, you can sell out all the growth stocks and build a new portfolio of quality ASX dividend shares.
Some examples of those include Whitehaven Coal Ltd (ASX: WHC), Waypoint REIT Ltd (ASX: WPR) and BHP Group Ltd (ASX: BHP).
Those income stocks are currently paying out dividend yields of 10.7%, 6.4% and 8.8% respectively.
If we assume we can get the median yield out of those three examples, a $624,000 portfolio will start producing $54,912 of annual passive income.
The downside with this route is that selling all those growth stocks could trigger capital gains tax.
You will need personalised advice to figure out which of the methods are best for your circumstances.
