The Australian share market is a great place to generate passive income.
That's because a large number of ASX shares reward their shareholders with dividends twice a year. This provides investors with a pay check usually every March and September.
With that in mind, let's see what sort of income could be generated from an investment of $10,000 into ASX shares.
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Generating passive income from ASX shares
As you would expect, the more money you invest, the more passive income you can generate from ASX shares.
If you can average a dividend yield of 6% across your income portfolio by focusing on high-yield ASX dividend shares, such as those found in the Vanguard Australian Shares High Yield ETF (ASX: VHY), a $10,000 investment would provide $600 in dividend income.
While that's certainly a nice boost to your wallet without lifting a finger, it may be best to keep the money in your portfolio and take advantage of compounding.
Compounding is what happens when you earn returns on top of returns. In many respects, it supercharges your returns and helps you build wealth quicker. But by taking out the dividend income, you will be holding back this process.
Playing the long game
Let's imagine that instead of focusing on income stocks, you initially focus on growing your investment portfolio with growth and blue chip companies.
If you could achieve an average return of 10% per annum, which is in line with historical share market returns, your $10,000 investment would grow to be worth approximately $42,000 in 15 years.
At that point, if you were to restructure your portfolio so that it averaged a 6% dividend yield, you would be generating $2,520 in passive income each year.
Or if you were to grow your portfolio for 25 years before adapting to an income focus, you would have a portfolio valued at approximately $110,000 and passive income potential of $6,600 a year, all else equal.
Making contributions
But perhaps the most efficient way to do this is to add to your portfolio each year. This lets compounding really work its magic.
Starting with a $10,000 investment and then adding $500 a month into ASX shares would result in a portfolio valued at $240,000 in 15 years based on a 10% per annum return. A 6% dividend yield on that portfolio would produce $14,500 of passive income a year.
And if you were to do the same for 25 years, your portfolio would hit $730,000 and have passive income potential of almost $44,000 a year.
