If you're wanting to generate passive income, then ASX shares could be a great way to do it.
That's because many companies share a portion of their profits with their shareholders each year in the form of dividends.
Now, let's assume you already have a $20,000 ASX share portfolio. How could we turn that into passive income of $1,200 a month?
$1,200 of monthly passive income
Firstly, good job on building your investment portfolio. That's the first step out of the way.
The next step would be to do nothing, assuming your ASX share portfolio is diversified and filled with high-quality companies that have sustainable competitive advantages. If it isn't both of these, I would look to reshape it over a period of several months.
Once the portfolio is as we want it, we can then sit back and let compounding do its thing.
If we want $1,200 of monthly passive income, we're going to need to generate $14,400 of dividends each year. That's quite a big ask from a $20,000 investment, but in time we can get there.
With 5% dividend yields easy to find on the market, we are going to need to grow our ASX share portfolio to approximately $290,000 for it to generate $14,400 of dividends eventually.
Growing our portfolio
Over the last 30 years, the Australian share market has generated a total return of 9.6% per annum.
If we just invested $20,000 and left it to earn that level of return, it would take 29 years to get to our target level. At that point, we could reshape our portfolio to have a focus on passive income and then sit back and watch the dividends come rolling in.
But if you want to get there sooner, you could add to your portfolio on a regular basis.
For example, if you were to add $500 to your portfolio each month, you would get to $290,000 in 15 years. Or if you could afford to contribute $1,000 a month to your portfolio, then you would get there in 11 years.
While it may take a bit of effort, it will be worth it for a lifetime of passive income thereafter.