Generating passive income from the share market isn't difficult.
In fact, it's entirely possible to make $50,000 in passive income each year by investing.
But how would an investor go about this? Let's look at three easy steps you could take to achieve this goal.
Image source: Getty Images
Step 1: Invest regularly
The best way to grow your wealth is arguably to make regular investments in ASX shares over a long period. This allows investors to take advantage of compounding, which supercharges returns.
For example, according to Fidelity, between December 1991 and December 2022, the Australian share market delivered an average return of 9.6% per annum. That's despite battling through wars, a global financial crisis, and of course, the COVID-19 pandemic.
This means that if you started with a $5,000 investment and then added $5,000 each year (or $420 a month) for 30 years, your portfolio would be worth approximately $915,000 today.
And while it is not possible to guarantee that ASX shares will do the same again over the next 30 years, these returns are in line with historic averages on Wall Street. So, it is reasonable to base our assumptions on them.
Step 2: Invest in quality
Instead of investing in speculative companies, investors could generate big returns by putting their money into high-quality companies with fair valuations, strong business models, and sustainable competitive advantages.
The Vaneck Morningstar Wide Moat ETF (ASX: MOAT) has been built around these qualities. Over the last decade, the index that it tracks has generated an average return of 16.9% per annum. That's well beyond what ASX shares have delivered.
It is also worth noting that Warren Buffett invests with these qualities in mind. And given how he has doubled the market return over five decades, this style appears to stand the test of time.
Step 3: Dividends
During your investment journey, you will inevitably receive dividend payments from some of the companies in your portfolio. If you don't require these funds, it would be smart to invest them back into the share market to take advantage of compounding.
But when the time comes, and you have built up a big enough portfolio, you can switch your focus to quality dividend-paying ASX shares and sit back and watch the passive income come rolling in each year.
With a $915,000 portfolio, it would take an average dividend yield of approximately 5.5% to generate $50,000 of passive income.
