$10,000 of savings? Here's how I'd aim to turn that into a second income of $360 a month

The share market is a great place to supplement your income.

| More on:
Man holding out Australian dollar notes, symbolising dividends.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

If you're fortunate enough to have $10,000 in your savings account and have no plans for it, then it could be worth putting it to work for you in the share market.

Especially given that ASX shares have historically delivered significantly better returns than savings accounts.

In addition, it is possible to transform these funds into a second income if you invest wisely.

Generating a second income with ASX shares

With an average dividend yield in the region of 4%, a $10,000 investment would deliver a second income of approximately $400 a year.

That's hardly much to get excited about. But let time and compounding do their thing and it could be a very different story.

For example, the share market has historically generated an average annual return of 10%.

This means that if you were to invest your $10,000 into a group of high-quality ASX shares and matched the market return, in 25 years you would have a portfolio valued at approximately $110,000.

That's $100,000 more than you started with, without lifting a finger.

At this point, if you were to now reconstruct your portfolio to ensure you average a 4% dividend yield across it, you will be generating $4,400 in income each year.

By spreading this out evenly across the months, you would be pocketing a second income of just over $360 a month.

It is also worth noting that it is quite easy to construct a portfolio with a much higher dividend yield.

Thanks to shares like ANZ Group Holdings Ltd (ASX: ANZ) and Telstra Group Ltd (ASX: TLS), averaging a 5% yield is achievable across a portfolio.

If you were to do this with your $110,000 portfolio, your second income would be $5,500 per annum or $460 a month.

And the best thing about ASX shares is that if they and their dividends continue to compound, your second income would grow each year thereafter.

For example, a 5% increase in dividends the next year would result in $5,775 of income per annum or $481.25 per month.

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has positions in and has recommended Telstra Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Dividend Investing

A female coal miner wearing a white hardhat and orange high-vis vest holds a lump of coal and smiles as the Whitehaven Coal share price rises today
Dividend Investing

Invest $10,000 in New Hope shares and get $1,006 in passive income

Many ASX investors buy New Hope shares for their high yielding, fully franked dividends.

Read more »

A man in a suit looks serious while discussing business dealings with a couple as they sit around a computer at a desk in a bank home lending scenario.
Dividend Investing

Forget term deposits and buy these ASX 200 dividend shares

Analysts have good things to say about these dividend options.

Read more »

An Australian farmer wearing a beaten-up akubra hat and work shirt leans on a fence with livestock in the background and a blue sky above.
REITs

Should you buy this ASX REIT for its 6% dividend yield?

This expert is telling investors to take advantage of a 6% yield...

Read more »

A happy construction worker or miner holds a fistfull of Australian money, indicating a dividends windfall
Dividend Investing

Here's the BHP dividend forecast through to 2028

Will the Big Australian continue to reward shareholders with big dividends?

Read more »

A man holding a cup of coffee puts his thumb up and smiles while at laptop.
Dividend Investing

Analysts say these ASX 200 dividend stocks are best buys in April

What are analysts saying about these high quality companies?

Read more »

A man in a business suit whose face isn't shown hands over two australian hundred dollar notes from a pile of notes in his other hand to an outstretched hand of another person.
Dividend Investing

Buy these ASX dividend shares for income

Analysts have put buy ratings on these income stocks.

Read more »

footwear asx share price on watch represented by look holding shoe and looking intently
Consumer Staples & Discretionary Shares

Does this ASX 300 retail stock really have a 7.6% dividend yield right now?

Is a 7.67% dividend yield too good to be true?

Read more »

A man in his office leans back in his chair with his hands behind his head looking out his window at the city, sitting back and relaxed, confident in his ASX share investments for the long term.
Dividend Investing

Brokers say these ASX 300 dividend stocks are top buys

Attractive dividend yields could be on offer with these shares.

Read more »