I bet if you asked anyone whether they'd like a $100-per-day stream of passive income, they would fall over themselves to say yes. But if you asked most of those people how to get there, excitement would turn to confusion.
I think ASX shares are the best way for most Australians to build a second income stream. And you can absolutely get to the point of receiving $100 a day from investing in ASX shares. It just takes time, patience, discipline and the right attitude.
So let me explain how I'm aiming to one day bag $100 a day in passive income from ASX dividend shares.
Let's start at the start. Receiving $100 a day in passive income would mean we are netting $700 a week, or $36,500 a year.
When we receive a dividend, we usually put it in the context of a dividend yield – that is to say, how much cash we are receiving relative to how much we've invested. If one invests $1,000 onto a dividend-paying share and gets $40 back every year in dividends, that's a yield of 4%.
Is $100-a-day passive income from ASX shares just a pipedream?
There are many dividend shares on the ASX, paying out a wide variety of yields from year to year. Some pay dividends equivalent to a 2% dividend yield, and some at a 7% yield.
I think a good average to aim for is a 4% yield. That's roughly what an index fund covering the largest 200 or 300 shares on the ASX has typically paid out in years gone by. If one amasses a diversified portfolio of dividend shares, or just invests in an ASX index fund, that's pretty close to what you'd probably be receiving in passive income.
So if we want $36,500 a year in dividend payments from ASX shares, you would need to invest approximately $912,500 today to receive that kind of yield upfront.
Now if you're feeling a little despondent by that figure, I wouldn't blame you. But don't be put off.
Let me show you a roadmap of how to get there.
Starting from scratch
Let's say one has $20,000 worth of life savings in the bank today. And let's assume you decide to invest that in an ASX index fund. The most popular exchange-traded index fund on the ASX is the Vanguard Australian Shares Index ETF (ASX: VAS).
Over the past five years (to 30 November), this exchange-traded fund (ETF) has returned an average of 8.7% per annum (assuming the passive income dividends are reinvested, not taken out and spent).
If we take that rate of return (which is not guaranteed, but bear with me), our $20,000 would grow to just under $270,000 over a 30-year period.
Decent, but not enough to build a second, passive income stream over a working lifetime by retirement.
But let's say our investor was able to scrape their pennies together and invest an extra $100 a week, or $400 a month. After 30 years, they'd have a grand total of $957,500 to their name. More than enough to stop reinvesting those dividends and start enjoying $100 a day in passive income.
I told you you would need patience and discipline. Discipline to invest $100 per week like clockwork and patience to continue to do so over a 30-year period and enjoy the wonders of compound interest.
How to speed your second income up
Of course, there are a few things you can do to speed this passive income process up. If you can find an extra $100 a week to invest over this 30-year span on average, you would get to that $100 a day mark after 24 years instead of 30.
Say you invest in a market-beating portfolio of individual shares that collectively return 10.5% per annum, not 8.7%, you'd only have to wait 26 years. If you combine those two variables, you'd have a 22-year waiting period.
Those might all sound like long time frames (and they are). However, investing for that passive income could mean a significantly earlier retirement for someone who starts out in their 20s.
