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.
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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.
