$15k stashed away? I could turn that into a second income worth $22 a day!

Dividends and compounding are excellent financial forces.

| More on:
Woman on a swing at a beach, symbolising passive income.

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

The ASX share market is an excellent pathway for investing money that can deliver capital growth and unlock an impressive second income. If done wisely, an investor with $15,000 can also enjoy a pleasing level of dividends.

But investing $15,000 won't create enough cash flow to retire straight away. With a portfolio that delivers a 5% dividend yield, for example, a $15,000 fund will create $750 of annual dividend income — just over $2 per day.

But there is a way to make significantly more than that through the magic of compounding.

Compounding is a powerful tool

We can all utilise the power of compounding with time and money. Savings accounts deliver compounding because they pay interest, and then the interest earns interest, and so on.

As Albert Einstein once said:

Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn't, pays it.

The global share market has returned an average of around 10% per annum over the long term, and in the last 10 to 15 years, it has done even better than that. The Vanguard MSCI Index International Shares ETF (ASX: VGS) has returned an average of 12.9% per annum since its inception in November 2014.

And plenty of individual ASX shares have also performed strongly.

If we take $15,000 and invest it in businesses that can deliver good returns, it can grow into a much bigger number by itself. Think how a small sapling tree can grow into a mature tree over time all by itself. We can do the same with investing in ASX shares for a second income.

Plant a tree now, and it can eventually bear wonderful financial fruit in the future.

With the magic of compounding, if we invested that $15,000 and it grew by 10% per annum for 25 years, it would become worth $162,521, according to Moneysmart.

And with a 5% dividend yield, investors would receive a second income of $8,126 annually or an average of $22 per day.

Which ASX dividend shares I'd buy

I believe it's a good idea to own shares in companies capable of producing organic growth. These companies can deliver pleasing returns in coming years while also providing a good level of dividend income. Another tip to maximise wealth growth potential is to re-invest the dividends.

I'd choose businesses like Washington H. Soul Pattinson and Co. Ltd (ASX: SOL), Brickworks Limited (ASX: BKW), Wesfarmers Ltd (ASX: WES), Telstra Group Ltd (ASX: TLS), Centuria Industrial REIT (ASX: CIP) and Sonic Healthcare Ltd (ASX: SHL). These are stocks that can deliver solid total returns and a good second income, in my view.

Some exchange-traded funds (ETFs) could also be an excellent way to 'grow the tree' including VanEck MSCI International Quality ETF (ASX: QUAL) and VanEck Morningstar Wide Moat ETF (ASX: MOAT).

Motley Fool contributor Tristan Harrison has positions in Brickworks, Sonic Healthcare, and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Brickworks, Washington H. Soul Pattinson and Company Limited, and Wesfarmers. The Motley Fool Australia has positions in and has recommended Brickworks, Telstra Group, Washington H. Soul Pattinson and Company Limited, and Wesfarmers. The Motley Fool Australia has recommended Sonic Healthcare, VanEck Morningstar Wide Moat ETF, and Vanguard Msci Index International Shares ETF. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Dividend Investing

Accountant woman counting an Australian money and using calculator for calculating dividend yield.
Technology Shares

Which ASX 200 technology stock will pay the best dividend yield in 2025?

Earnings season is underway and dividend announcements are on investors' minds.

Read more »

A man holding a cup of coffee puts his thumb up and smiles while at laptop.
Dividend Investing

3 excellent ASX dividend shares to buy next week

Income investors may want to check out these shares that have been rated as buys by analysts.

Read more »

Happy young woman saving money in a piggy bank.
Dividend Investing

1 fantastic ASX dividend stock down 25% to buy now

One leading broker thinks that this beaten down dividend stock is a buy.

Read more »

Three women dance and splash about in the shallow water of a beautiful beach on a sunny day.
Dividend Investing

18 ASX 200 shares set to pay 5%-plus dividend yields in 2025

With some banks offering 5% risk-free yields on term deposits, investors are on the lookout for ASX dividend shares that…

Read more »

A couple sits in their lounge room with a large piggy bank on the coffee table. They smile while the male partner feeds some money into the slot while the female partner looks on with an iPad style device in her hands as though they are budgeting.
Dividend Investing

2 reasons I'm buying ASX income shares instead of investing in term deposits

Income stocks look like the right pick to me.

Read more »

Two women happily smiling and working on their computers in an office
Dividend Investing

Which ASX 200 communications share will pay the best dividend yield in 2025?

Several communications stocks are expected to pay dividend yields above the ASX 200 Index average of 4%.

Read more »

Man holding Australian dollar notes, symbolising dividends.
Dividend Investing

Why these ASX dividend shares could be buys for income investors

Analysts are tipping these shares as buys for income seekers. Let's see what they are forecasting.

Read more »

A businessman lights up the fifth star in a lineup, indicating positive share price for a top performer
Dividend Investing

Bell Potter names 2 of the best ASX dividend stocks to buy

Let's find out why the broker is feeling bullish on these names.

Read more »