Building a passive income of more than $191,000 a year would be life-changing for most Aussies.
Myself included.
And ASX dividend shares offer a great means to achieving that goal.
While my portfolio of ASX shares may lose value over shorter periods, or even an entire year, history shows that longer-term the stock market beats every other asset class.
Now if I invest $500 each month, or $6,000 a year, I obviously won't reach my $191,000 annual passive income goal overnight. I'll need to be patient. And I'll need to do thorough research on the ASX shares I add to my portfolio.
If I wasn't comfortable with that level of research, I'd seek out some expert advice.
Let's look at some numbers.
What kind of returns can I target?
Let's get an idea of my timeline to build up to more than $191,000 in yearly passive income. Over the past three years, the S&P/ASX 200 Gross Total Return Index (ASX: XJT), which includes all cash dividends reinvested on the ex-dividend date, has gained 24%. Or an average annual gain of 8%.
But I believe I could do better. With diligent research or perhaps that expert advice, I believe I could achieve an average 10% annual return over time.
Now I'd be sure to invest in a diversified basket of ASX shares (at least 10), with a preference for S&P/ASX 200 Index (ASX: XJO) stocks. These tend to be less volatile than small-cap shares, yet the right ones can still deliver tidy gains to investors.
In 2023, for example, Commonwealth Bank of Australia (ASX: CBA) shares delivered an accumulated gain (including dividends) of 13.4%.
I'd also lean towards ASX shares that offer franking credits on their dividends. That way, I should be able to hold onto more of my passive income at tax time.
And I'd also be sure to reinvest any and all dividends coming my way. That will help me achieve my goal significantly sooner.
The road to more than $191,000 in annual passive income
As mentioned up top, my road to more than $191,000 a year in passive income isn't a short one.
So it's best to get started earlier in life.
If I began investing just $500 a month in ASX shares at the age of 30, and achieve my 10% average annual gains, then I can let the magic of compounding do its work.
Here's how my ASX share portfolio will have grown over the years:
- At 10 years: $103,770
- At 20 years: $383,348
- At 30 years: $1,140,163
- At 40 years: $3,188,890
As you can see, after 40 years of diligently investing $500 a month, and by now ready to retire, my ASX passive income portfolio has grown to almost $3.2 million.
If can achieve a 6% yield from that portfolio, which I believe I could, that would give me a passive income of $191,333 a year without having to touch that invested capital.
And leaving that $3,188,890 invested in quality ASX shares should help me keep growing my wealth as markets rise.
