In the past few weeks, if you're like me, you will have been receiving a number of pay checks from your investments.
While I don't invest for passive income at this point in my life, I know one day that these dividends will be very valuable.
But how could I generate enough passive income from my investments in ASX shares to live off in retirement? Let's take a look at one way that this could potentially be achieved.
Investing for passive income
The key to building your wealth and generating passive income is to make consistent investments into ASX shares and then let compounding work its magic.
If I were to invest $200 a month, which might seem like a relatively insignificant amount, I could eventually be pulling in significant passive income each year if I let my investment portfolio grow.
Over the past few decades, ASX shares have generated a total average return of approximately 10% per annum. Unfortunately, there's nothing to say that it will do the same in the future, but I feel it is fair to base our assumptions on this level of return continuing.
Especially if I focus on investing in high quality companies that have strong and sustainable business models and positive long-term growth outlooks. These type of companies tend to outperform the market.
Companies such as biotech leader CSL Ltd (ASX: CSL), industrial property company Goodman Group (ASX: GMG), sleep disorder treatment company ResMed Inc (ASX: RMD), and cloud accounting platform provider Xero Limited (ASX: XRO) immediately spring to mind as potential candidates for buy and hold investments.
With that in mind, if I were to invest $200 a month into ASX shares, starting at zero, in 30 years I would have a portfolio valued at approximately $415,000 if I achieved a 10% annual total return and reinvested my dividends.
Now here's where compounding really works its magic. It may have taken me 30 years to get to $415,000. But it will take me just 7 more years to get to $835,000.
At that point, I would construct a portfolio filled with strong high-yielding ASX dividend shares or exchange traded funds (ETFs) to average a 6% dividend yield.
A dividend yield of 6% on an $835,000 investment portfolio would produce $50,000 of passive income each year (and growing). Then I would sit back and watch the money come rolling in each year without having to lift a finger.
