The country, and the world, are surrounded by businesses providing products and services. Our telecommunications, our electricity, our food, the clothes and shoes we wear, the cars we drive – businesses are involved with so many different areas.
The profit they make doesn't just vanish. Some of it is re-invested back into the business, but some of it may be paid to shareholders in the form of dividends.
There are three steps to unlocking excellent cash flow.
Start saving $3 per day
I'm not suggesting to invest $3 per day, but start putting away $3 per day into a savings account with the specific savings goal of investing it. We could change that to be $21 per week or $91 per month, Either way, I think that's a reasonable goal.
Annually, that translates into roughly $1,100.
With interest rates now much higher, savers can earn a decent return while the cash is sitting in the bank.
I'd suggest that investors aim to build up to around $1,000 – some brokers have cheap brokerage for orders under $1,000.
Put time into researching different aspects of the ASX share market
It's a good idea to learn about the different elements of the share market as well as ASX passive income.
For example, knowing about franking credits is very helpful for understanding how Aussies can benefit from investment income. In fact, it's a good idea to learn about dividends.
It's important to know that some businesses are unlikely to deliver consistent dividends, such as ASX mining shares. However, cyclical companies may be compelling investments if they're at the worst point of that economic cycle.
Invest in ASX passive income shares
Some businesses have built a long track record of dividend stability and growth, such as Wesfarmers Ltd (ASX: WES), Brickworks Limited (ASX: BKW) and Washington H. Soul Pattinson and Co. Ltd (ASX: SOL).
Some businesses have low dividend yields but are rapidly growing their payouts like Johns Lyng Group Ltd (ASX: JLG).
The easiest way to invest for ASX passive income might be to choose an investment that provides exposure to a whole basket of shares, like an ETF and a LIC. This way we don't need to worry about building a portfolio ourselves. That's where names like Vanguard Australian Shares Index ETF (ASX: VAS) could be useful because of the dividend yields they have.
Saving $3 per month could mean making a $1,000 investment in less than a year. With a 5% dividend yield, that would translate into $50 per year. In year two, we can add another $50 (annualised), plus the starting $50 may grow to say $55 thanks to companies increasing their payout. We can also grow our dividends if they are re-invested. And so on – each year can build up that ASX passive income.
I'd suggest if someone is investing $1,000 each year for passive income, they'd be best to go for businesses delivering growth, or perhaps an ETF. The growing businesses can help self-fund the dividend growth as the years go by – it's good to think about the long-term.