The share market is a great place to generate a passive income.
That's because most ASX 200 stocks will share a portion of their profits with their loyal shareholders twice a year in the form of dividends.
This means you can sit back with your feet and let these companies do the hard work for you, while pocketing your share of the profits every six months.
In light of this, if I had $7,000 in a savings account and no plans for these funds, I would consider putting them to work in the share market.
However, much like a bank account, you are not going to start generating material passive income immediately with this investment. But if you are patient, your savings could compound into something larger and turn the share market into your own personal ATM.
Generating passive income from ASX 200 stocks
Historically, share markets have generated an average return of 10% per annum. Some years are stronger, some years are weaker. But on average, 10% is what it has delivered.
And while past performance is not a guarantee of future returns, I think it is reasonable to base our assumptions on the share market performing in line with historical averages.
With that in mind, let's see what that $7,000 could turn into with ASX 200 stocks.
Long term returns
If you only wish to invest that $7,000 into the share market and make no further contributions, then you would be looking at growing your portfolio to the following (based on a 10% annual return):
- 10 years: $18,000
- 20 years: $47,000
- 30 years: $122,00
- 40 years: $315,000
What about passive income? I hear you ask. Well, if you are able to build a portfolio that averages a 6% dividend yield, the amounts above would generate the following in annual dividend income:
- 10 years: $1,080
- 20 years: $2,820
- 30 years: $7,320
- 40 years: $18,900
Clearly, to really make meaningful passive income you're going to have to leave your $7,000 to compound for a substantial amount of time. By the 40-year mark, you would be pulling in the equivalent of approximately $1,500 in monthly passive income.
Building a time machine
If we had a time machine and could jump forward in time, we would be able to scoop up all that passive income.
But until they are invented, investors may have to do the next best thing. If you can contribute to your investment each year, then you could build your wealth quicker and grow your passive income.
Here's what would happen to a $7,000 investment into ASX 200 stocks each year instead of just once with a 10% per annum return:
- 10 years: $141,000
- 20 years: $488,000
- 30 years: $1.39 million
- 40 years: $3.7 million
Now let's see what annual passive income a portfolio that averages a 6% dividend yield would generate from these amounts:
- 10 years: $8,460
- 20 years: $29,280
- 30 years: $83,000
- 40 years: $222,000
Based on the above, it is conceivable that you could have around $2,500 of monthly passive income from your ASX 200 stocks in 20 years if you are able to invest $7,000 into the market each year.
Food for thought.
