Aussies with a few thousand dollars can start generating excellent passive income with ASX shares.
Investors can use compounding to grow their investment cash flow into very impressive amounts over time.
Even someone with $0 savings today can build some cash in the bank and then start investing.
Start saving
We need money to invest money – it usually doesn't just appear in front of us!
Everyone's finances are different, so I'm not going to dictate for everyone what a realistic amount is to save each month. But, let's assume that we're aiming to invest $6,000 in 12 months from now.
Dividing $6,000 into 12 equal amounts, we're talking about an average of $500 per month. For some households, that may be a challenge, and for others, it may be easy. Putting the money into a savings account could generate interest and accelerate the growth of savings.
Investing for a high dividend yield
Businesses with a generous dividend payout ratio and a relatively low price/earnings (P/E) ratio can have an attractive dividend yield.
In 12 months, we'll be in (or about to start) FY25 for most businesses, so let's look at the FY25 forecasts on Commsec for three high-yield ASX dividend shares that I currently like for their passive income payout yields.
Diversified real estate investment trust (REIT) Charter Hall Long WALE REIT (ASX: CLW) could pay a distribution yield of 7% in FY25.
Food, hardware and liquor business Metcash Ltd (ASX: MTS) could pay a grossed-up dividend yield of 8.4% in FY25.
Fund manager GQG Partners Inc (ASX: GQG) could pay a dividend yield of 9.3% in FY25.
Between those three names, that's an average dividend yield of roughly 8.2%.
If we invested $6,000 today, we'd get (forecast) an annual passive income of $492 for FY25.
Compound the passive dividend income
One of the most powerful financial habits investors can do is to reinvest dividends into buying more shares.
Assuming we received the same yield over time – it's unlikely to be the exact same dividend yield in reality – then reinvesting the dividends (and not accounting for any taxes charged on the dividend income) would turn into a portfolio value of $74,718 in 32 years, which would make $6,127 per year or $510 per month.
This assumes no more investing in the ASX share market. If we kept allocating $500 per month, we'd get to our $500 per month goal in around eight years. Investing $500 per month for 20 years would create a portfolio value of $310,000, making over $25,000 of annual passive income!
