ASX shares can be a great source of passive income for investors who want good monthly or annual cash flow.
Company management teams do their best to make a profit for shareholders. They can then decide to pay investors dividends or distributions from that profit generation.
Good companies and investments grow their profits over time. That can lead to a rising share price and, hopefully, a growing passive income.
This is one of the main benefits of ASX shares compared to a bank term deposit — they can both offer passive income, but ASX shares can offer that growth element, whereas term deposit returns are fixed.
So, how can an investor go from earning $0 passive income to $2,000 per month (or $24,000 per year)? Firstly, we need to find some monthly savings. Whether that savings is already available, or some more income or reduced spending is required, we need to unlock some cash flow.
In this article, we'll explore investing an average of $300 per week. Of course, we can save over multiple weeks (such as once per month) and invest a larger amount to save on brokerage.
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The power of compounding
Albert Einstein loved compound interest. He supposedly once said:
Compound interest is the most powerful force in the universe. Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn't pays it.
The great thing about compounding is that we can set the wealth-building ball rolling, and it can hopefully grow over the long term. With the power of investment returns, we don't need to save all that cash ourselves. The investment can grow itself.
If you invested an average of $300 per week, that would translate into $15,600 per year. On a monthly basis, that works out to $1,300.
How quickly could this money grow? The ASX share market has a history of delivering returns of close to 10% per annum over the ultra-long term, including the passive income payments.
Putting this together, if someone invested $300 per week/$1,300 per month and it grew by 10% per annum, it would become:
- $248,624 after 10 years
- $893,490 after 20 years
- $2.56 million after 30 years.
Passive income from ASX shares
If we wanted to receive $24,000 of annual income or $2,000 per month, we need to figure out what investment balance we'd need.
Every investment can have a different dividend yield, so there's no right answer about how large the nest egg must be.
I think a 5% dividend yield could be a reasonably sustainable target for a portfolio of ASX dividend shares. With a 5% dividend yield, to receive $24,000 of passive income, then we'd need an investment balance of $480,000, which could take less than 15 years to get there.
Which ASX dividend shares would I consider?
I'd want businesses that can grow their dividends over the long term to protect against inflation and hopefully deliver wealth growth, such as Washington H. Soul Pattinson and Co. Ltd (ASX: SOL), Brickworks Limited (ASX: BKW), Wesfarmers Ltd (ASX: WES), and Telstra Group Ltd (ASX: TLS).
