How I'd invest $40k to create a lifelong passive income of $36,000 a year

I'd use some ASX growth stocks to turn your savings into a steady flow of cash that you need not work for.

| More on:
Happy couple enjoying ice cream in retirement.

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

Do you think you could turn $40,000 into a never-ending pot that will provide you $36,000 of passive income each year?

Sounds pretty crazy, but it's not that far-fetched.

Consider this hypothetical:

Diversify to even out sector fortunes

There are many ways to invest for passive income, but I personally prefer ASX growth shares.

As well as the potential to outperform, I find it more qualitatively satisfying to watch these businesses expand and mature to bigger and better things.

Let's take a look at these growth stocks that many professionals are recommending as buys at the moment: Lovisa Holdings Ltd (ASX: LOV), Mader Group Ltd (ASX: MAD) and Avita Medical Inc (ASX: AVH).

Firstly, they are diversified in the industries they play in: retail, mining services and healthcare.

Diversification is crucial so that the risk of your portfolio completely tanking is managed. The idea is that if one sector is suffering from economic conditions, the others could make up for it.

Diversify for performance

Secondly, they are all growing businesses with bright futures.

Of course, past performance is not an indicator of the future. But the track records of these stocks give us an idea into how a growth portfolio could multiply your $40,000.

Over the past five years, the Lovisa share price has rocketed 247%. The Mader Group, since listing four years and three months ago, has seen its stock soar 492%.

That makes Avita Medical's five-year gain of 109% seem pretty tame, although that's excellent in itself.

Those figures equate to compound annual growth rates (CAGR) of 28.3, 52% and 15.9%.

Sure, there is no way in hell you will pick an entire portfolio of such huge winners.

But, again, with proper diversification you might end up with a few of these alongside some duds.

With prudent management, perhaps you can manage a portfolio-wide CAGR of 12%.

Turn your savings into a passive income machine

Returning to that $40,000, say you have the patience to let that grow for 12 years at 12% per annum while adding $500 each month along the way.

The stock portfolio will have then grown to more than $300,000.

From that point on, sell off the 12% gains each year to receive your passive income.

That will provide you $36,000 of cash every 12 months without you having to work for it.

How good is that!

Of course, some years the payout will be much lower than that amount and sometimes there will be no income at all.

But over the long run, with the help of some windfall years, the passive income could average out to $36,000.

Mission accomplished.

Motley Fool contributor Tony Yoo has positions in Avita Medical and Lovisa. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Avita Medical, Lovisa, and Mader Group. The Motley Fool Australia has positions in and has recommended Mader Group. The Motley Fool Australia has recommended Avita Medical and Lovisa. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Investing Strategies

Modern accountant woman in a light business suit in modern green office with documents and laptop.
Value Investing

Looking for ASX value shares? Here's 1 I'd buy and 1 I'd avoid!

It's not an easy exercise to identify which stocks are undervalued and which ones are simply terrible. Here's an example…

Read more »

A man sits bolt upright watching something intently on his television.
Dividend Investing

34 ASX 200 shares with ex-dividend dates next week

Do you own any of the 34 stocks set to cut off dividend eligibility next week?

Read more »

A little boy holds his fingers to his head posing as a bull.
Blue Chip Shares

Here are 2 high-quality ASX 200 blue chip shares that analysts are bullish on

These blue chips have been given a big thumbs up.

Read more »

Woman refuelling the gas tank at fuel pump, symbolising the Ampol share price.
Energy Shares

Why is the Ampol share price tumbling 5% on Friday?

The Ampol share price is taking a big fall on Friday.

Read more »

Close up of woman using calculator and laptop for calculating dividends.
Dividend Investing

Morgans says these ASX dividend stocks are buys

Here's what the broker is saying about these shares.

Read more »

Australian dollar notes in businessman pocket suit, symbolising ex dividend day.
Dividend Investing

Analysts name 2 high-yield ASX dividend shares to buy

Above-average yields could be coming for owners of these shares.

Read more »

A laughing woman pushes her friend, who has her arms outstretched, in a supermarket trolley.
Dividend Investing

Want to cash the latest Coles dividend? Here's what you need to do

You'll need to hurry if you want Coles' next dividend payment.

Read more »

The sea's vastness is rivalled only by the refreshing feel of the drinks two friends share as they saunter along its edge, symbolising passive income.
Dividend Investing

$7,000 of money to spare? Here's how I'd aim to turn that into $1,000 in annual extra income

ASX dividend shares can provide investors with a tidy extra income.

Read more »