There's something to be said for earning a fair wage from a fair day's work, yet there's nothing quite like sitting back and watching passive income come rolling in.
Of course, just like a fair day's wages, no one is likely to hand you $3,000 in annual passive income out of the blue.
So, here's how I'd go about earning that welcome extra cash boost today with limited savings.
The road to passive income with ASX dividend shares
The best income building method I know of is offered by investing in quality ASX dividend shares.
Generally, though not always, these will be S&P/ASX 200 Index (ASX: XJO) stocks.
I prefer to invest in the larger end of the market for passive income, as these companies tend to be less volatile than small-cap ASX shares, and I'm aiming for relatively smooth income returns. There's also a fair bit more analyst coverage available on blue-chip stocks, making for easier research.
I also recommend preferencing ASX 200 companies that pay fully franked dividends. That should enable investors to hold onto more of their dividend payouts come tax time.
And I prefer stocks with long track records of making reliable dividend payouts. That doesn't guarantee future payouts, but it helps.
When doing your research, keep in mind that the yields you see quoted are generally trailing yields. Future yields may be higher or lower, depending on a range of company-specific and macroeconomic factors.
Of course, we're gunning for rising yields here!
$2,950 in savings? No problem!
Now, not many Aussies have enough ready cash to earn $3,000 a year in passive income from ASX stocks overnight.
We have to be realistic in that no company is paying out more than 100% of its profits in dividends.
So, let's say you have $2,950 to invest in the stock market.
With brokerage fees in mind, you may wish to start with just five ASX dividend stocks. Ideally, these will operate in different sectors and locations to reduce the overall risk to your passive income portfolio.
ASX 200 coal share New Hope Corp Ltd (ASX: NHC), for example, trades on a fully franked trailing yield of 9.8%.
ASX 200 bank stock ANZ Group Holdings Ltd (ASX: ANZ) trades on a partly franked trailing yield of 6.0%.
And ASX 200 iron ore miner Fortescue Ltd (ASX: FMG) trades on a fully franked trailing yield of 8.2%.
You get the idea.
Taking these three ASX 200 dividend stocks as our baseline, if you invested equally across all three, you could earn a yield of 8.0%.
Investing $2,950 today would then offer $224 a year in passive income. Well short of our $3,000 annual goal.
This is where some patience comes into the picture.
Now, with share price gains in mind, I think that by reinvesting those dividends, we can achieve an accumulated annual return of 11%.
With the magic of time and compounding on our side, that will see our $2,950 investment in ASX 200 dividend shares today grow to a whopping $40,845 in 24 years.
At an 8.0% dividend yield, you could then take out a bit more than $3,267 a year in passive income without touching our accumulated capital.
As always, if you're unsure which ASX shares may be best for you, just reach out for some expert advice.
