ASX shares can be a great place to find passive income that can eventually deliver cash flow of $10,000 and more over time. It's definitely possible to get there from scratch, it could take just a few years.
It's a difficult time to save money to invest at the moment with the large rise in cost-of-living due to inflation and higher interest rates. Each household just needs to do the best they can under the circumstances.
But, to make the passive income goal happen, we've got to put the money to work one way or another.
Spend less than we earn
Hopefully, every Aussie household is able to put together a monthly savings amount, whether that's $500, $1,000 or even more.
I think aiming for $1,000 per month is a good target because it's a four-digit figure and that could be a useful milestone to aim for.
Being able to save $1,000 each month would mean being able to invest $12,000 annually.
Choose good ASX share investments
There are a number of good ASX shares and exchange-traded funds (ETFs) that we can choose from.
Some effective investments for total returns might be ideas like Vaneck Morningstar Wide Moat ETF (ASX: MOAT) and Vanguard MSCI Index International Shares ETF (ASX: VGS). However, they typically don't offer much of a dividend yield.
I also like some businesses that have a long-term history of growing their dividends and underlying value, such as investment house Washington H. Soul Pattinson and Co. Ltd (ASX: SOL). This could be a good option for an investor wanting to balance dividend income and capital growth.
ASX growth shares that pay dividends can also be very effective investments for long-term passive income because of their ability to grow earnings and pay rising dividends at the same time.
I very recently invested in two names for the growth-focused part of my portfolio – jewellery business Lovisa Holdings Ltd (ASX: LOV) and building restoration business Johns Lyng Group Ltd (ASX: JLG). Their dividends have increased significantly over the past five years and could be much larger in five more years from now.
While an ASX growth share may have a lower starting dividend yield, if it's able to grow earnings and maintain the dividend payout ratio, then the dividend yield compared to the cost of the shares could quickly grow from 3% to 4%, then 5%, then 6% and so on.
How quickly could we reach the $10,000 passive income goal?
If an investment has a 5% dividend yield, then a $1,000 investment would add $50 to the annual income.
An investment with a dividend yield of 4% could unlock an extra $40 of annual income in the first year.
After a year, that investment may be able to achieve a 10% increase or more to the dividend payment. So $40 could become $44 in year two, $48.40 in year three and so on.
Let's say we are able to get a 5% dividend yield for $10,000 of passive income from a diversified mixture of ASX shares – that would need a portfolio size of $200,000.
Assuming we invest $1,000 per month and it returns an average of 10% per annum (including allocating dividends received to buy more shares), it would take less than 11 years to reach a portfolio value of over $200,000 and therefore have a big enough balance to receive $10,000 of annual passive dividend income.
