A great way to earn passive income is by investing in dividend-paying blue-chip ASX shares with a long-term approach. By doing this, it could be possible to build sizeable ongoing income streams.
With that in mind, if I had a spare $7,000 sitting in a savings account, here is how I would go about trying to turn it into a passive income of $350 each month.
Turning $7,000 into $350 of monthly passive income
Firstly, $350 of passive income each month is the equivalent of pulling in $4,200 per year in dividends.
Given that a 5% dividend yield is easily achievable with ASX shares, we're going to base our calculations around that. This means we're going to have to build our $7,000 investment into $84,000 if we want to generate the desired amount of income.
While going from $7,000 to $84,000 might seem like an impossible task, history shows that it isn't.
For example, over the last 30 years, the Australian share market has generated an average total return of 9.6% per annum. This would have turned a single $7,000 investment into approximately $110,000.
While there is no guarantee the market will generate the same level of return in the future, if it were to do so, it would take just over 27 years to reach our target destination.
At that point, we can adjust our portfolio to ensure it has an average dividend yield of 5%, and then sit back and watch the passive income flow in.
We could also get there quicker if we are willing to put in a little more capital each year.
For example, starting with a $7,000 investment and adding $2,000 each year to our portfolio would almost halve the time it takes to hit our target to 14 years.
The key is coming up with a plan and then sticking with it whatever is happening in the market.
But which ASX shares should you buy?
When thinking long term, we want to buy quality companies with strong business models and, ideally, sustainable competitive advantages. And if they pay dividends, it may be best to reinvest them until we need them as passive income. This allows us to benefit from compounding.
There are plenty of blue-chip ASX shares that tick these boxes, a couple of which appear to be on sale at present.