Earning $40 a week in passive income from ASX shares is a goal most every investor can achieve.
If I had $4,000 in savings and was gunning for a $40 weekly, or $2,080 yearly, passive income from ASX shares, here's how I'd go about it.
Time in the markets
First, I'll need some patience.
Assuming I achieve an average annual dividend yield of 7.7%, I'll need to own $27,013 worth of ASX dividend shares to earn $40 a week in passive income without having to touch that accumulated capital.
And I'm not going to endanger my $4,000 of savings by punting on a few high-risk growth shares to try turning that into $27,013 overnight!
Instead, I'll invest in a diversified portfolio of high-quality stocks and let the magic of compounding go to work for me to reach my passive income goal.
Over the past 12 months the S&P/ASX 200 Gross Total Return Index (ASX: XJT) – which includes all cash dividends reinvested on the ex-dividend date – has returned 10%. Some years will see higher returns, other years will see lower returns.
But I think I can achieve a 10% annual return.
According to my trusty compound interest calculator, it will take just over 19 years to see my $4,000 grow into $27,013.
Now, I could reach that goal earlier if I invest a little extra every few months. But for the purposes of this article, I'll simply stick with my $4,000 of initial savings to build that passive income stream.
Repositioning my ASX share portfolio for passive income
Once I've achieved my capital goal, I'd reposition my portfolio towards high-yielding ASX dividend stocks with long track records for delivering reliable passive income.
As with my initial capital-building portfolio, diversification is important. So I'd aim to invest in a range of ASX dividend stocks, operating across various sectors and ideally even a few different countries.
I'd also lean towards ASX shares that pay fully franked dividends, to reap those potential tax rewards on that passive income stream.
Three S&P/ASX 200 Index (ASX: XJO) dividend stocks that would likely make it into my portfolio are:
- ASX 200 mining giant BHP Group Ltd (ASX: BHP)
- ASX 200 bank stock Australia and New Zealand Banking Group Ltd (ASX: ANZ)
- ASX 200 oil and gas stock Woodside Energy Group Ltd (ASX: WDS)
BHP shares trade on a fully franked trailing yield of 5.3%.
ANZ shares trade on a fully franked trailing yield of 6.8%.
And Woodside shares trade on a fully franked trailing yield of 11%.
Taking these three as an example, my average dividend yield would then be 7.7%. A yield I also believe I could achieve, on average, over the longer term.
At that yield, I'll see $40 of weekly passive income, or $2,080 a year rolling in. All from that first $4,000 investment.
