One day having a meaningful passive income is an aspiration shared by many Australians.
And it isn't hard to see why. Having money roll in each month without having to lift a finger is hard to say no to.
Well, the good news is that it is possible to achieve this goal with ASX shares.
That's because many companies share a portion of their profits with their shareholders each year in the form of dividends.
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$1,200 of monthly passive income from ASX shares
Let's assume you already have a $20,000 ASX share portfolio. How could you turn that into passive income of $1,200 a month?
The first step would be to actually do nothing. This is assuming you own a diversified portfolio filled with high quality ASX shares that have sustainable competitive advantages. Like the companies found in the popular VanEck Morningstar Wide Moat ETF (ASX: MOAT).
If it isn't both of these, you may want to consider reshaping it over a period of several months to give yourself the best chance of success.
Once the portfolio is in order, you can then sit back and let compounding do its thing.
If you want $1,200 of monthly passive income, you are going to need to generate $14,400 of dividends each year.
That is of course quite a big ask from a $20,000 investment, but history shows that in time you can get there. Especially with 5% dividend yields easy to find on the Australian market.
If you were to average a 5% dividend yield across your ASX share portfolio, you would need to grow it to approximately $290,000 to generate the desired about of passive income.
Growing your portfolio
Over the last 30 years, the Australian share market has generated a total return of 9.6% per annum.
If you made a single $20,000 investment and left it to earn that level of return, it would take 29 years to get to your target level.
At that point, you could reshape your portfolio again to have a focus on passive income and then sit back and watch the dividends come rolling in.
But if 29 years is too long for you, it would be possible to get there sooner if you can add to your portfolio on a regular basis.
For example, if you were to make an additional $500 investment to your portfolio each month, you would get to $290,000 in just 15 years. And if you could afford to contribute $1,000 a month to your portfolio, you would get there in 11 years.
Overall, the key is to find an investment plan that works for you and then stick with it through the years.
