You don't need a fortune to invest in ASX shares to begin building a healthy passive income.
In fact, by investing just $100 a month in ASX shares, I can achieve some substantial extra income. Perhaps to help pad my retirement lifestyle. Or perhaps to spend on some personal extravagances along the way. Probably a bit of both!
Here's how I'd go about it.
Building a passive income stream with ASX shares
The first thing I'll need to do is be sure to set aside $100 each month to invest in ASX dividend shares.
There are a lot of quality dividend stocks to consider. My preference goes to larger stocks, trading on the S&P/ASX 200 Index (ASX: XJO). Particularly those companies with a reliable track record of paying fully franked dividends.
The franking credits should give me some tax advantages. And the reliable track record decreases the odds that my passive income will unexpectedly get cut.
Second, while I'll set aside $100 each month to build my passive income, I won't invest that often. That's because I pay brokerage fees of $5 on any trade up to $1,000. To decrease the bite of those fees, I'll invest in batches of at least $500.
The third thing I'll need is patience.
Investing is not like playing the lottery. I won't garner a healthy passive income from the first year's $1,200 investment in ASX 200 shares alone. We'll look at how the power of compounding can turbocharge my returns below.
But first, what kind of yields can I expect?
High-yielding, quality ASX shares
Keeping in mind that we're looking at trailing yields here, backwards looking by definition, I'd look to invest in a range of at least eight high-quality, high-yielding ASX 200 dividend shares operating across a variety of sectors.
Shares in ASX 200 iron ore miner Fortescue Metals Group Ltd (ASX: FMG), for example, trade on a trailing yield of 6.8%, fully franked.
And shares in ASX 200 bank stock Westpac Banking Corp (ASX: WBC) trade on a trailing yield of 6.7%, fully franked.
Sticking with the various sector allocations, ASX 200 retail stock JB Hi Fi Ltd (ASX: JBH) is another company I'd target for passive income. JB Hi-Fi shares trade on a fully franked yield of 6.5%.
And to juice those returns and further diversify my passive income portfolio, I'd also invest in ASX 200 coal stock Whitehaven Coal Ltd (ASX: WHC). Whitehaven shares trade on a trailing yield of 10.8%, fully franked.
Now, getting back to patience and the power of compounding.
Let that passive income stream build
If I invest $100 per month (or $1,200 per year) evenly across the above four stocks (remember, I'll eventually expand that to at least eight ASX shares), I'll earn an average yield of 7.7%.
Assuming I maintain that yield over time, my $100 monthly investment will be worth $18,207 in 10 years and balloon to $69,297 in 22 years.
At that stage, with that constant yield, I'll be earning an annual passive income of $5,336 from my strategy. Or more than $100 a week.
And, of course, I hope to have invested in companies whose share prices have gone up over time as well.
