Passive income is really appealing to me – it's great being able to receive dividends as cash without needing to put in any work for it each year. ASX dividend shares can be the answer for investors wanting that cash flow.
But don't assume that you need to have hundreds of thousands of dollars to benefit from passive income. Most brokers allow investors to make their first investment with as little as $500.
If someone can start saving just $5 per day, they can start building towards creating a pleasing source of passive income.
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Start saving
If we think about saving $5 per day, which is a bitesize goal, that translates into an annual total of $1,825.
The great thing about saving cash at the moment is that we can receive a good amount of interest from the bank. Some bank savings accounts offer an interest rate of at least 5%.
How much do we need to save to start investing?
Some online share brokers offer a very low level of brokerage fees for transactions worth $1,000 or less, so I'd do some research to pick which broker to go with.
Once I'd saved between $500 to $1,000, I'd want to start investing. I'd try to minimise my brokerage costs, so investing closer to $1,000 would make more sense. Don't forget, you can earn interest while building towards that desired total.
Begin investing
Once we've built up some savings, it's time to put the money to work.
I think there are a few good ways to start building passive income. In this article, I'll point out ASX dividend shares and ASX-listed exchange-traded funds (ETFs).
Individual companies can provide a pleasing source of dividend income. They could be ones with a higher dividend yield, such as Telstra Group Ltd (ASX: TLS) or Centuria Industrial REIT (ASX: CIP), or ones that are building a track record of growing their payments consistently such as MFF Capital Investments Ltd (ASX: MFF) and Brickworks Limited (ASX: BKW).
Investors can also choose to own ETFs for passive income, which gives them access to a large part of the share market. Investors can access the global market with ETFs like the Vanguard MSCI Index International Shares ETF (ASX: VGS) and the VanEck MSCI International Quality ETF (ASX: QUAL). Meanwhile, ETFs like the Vanguard Australian Shares Index ETF (ASX: VAS) can give exposure to the Australian markets.
It's great to own a diversified portfolio with a single investment and just track the long-term wealth creation of the share market for a low fee.
Passive income
Once we start investing, the passive income will roll in.
Our investment decisions will dictate what dividend yield we get from each investment, but I'll use 5% as an example yield.
If someone invests approximately $1,000 into ASX shares with a 5% dividend yield, that would unlock $50 of passive income. Perhaps that investment will grow its payout by 10% and in 12 months the payment would be $55.
Plus, after some more saving, we can decide to invest another $1,000 and unlock an additional $50 of passive income (assuming the dividend yield is still 5%). That would take the annual passive income to $105.
And so on.
Keep on investing in ASX shares and watch that passive income grow.
The ASX share market has delivered an average return per year of 10%, so if the $5 figure per day can be invested and grow at 10% per annum, it'd become worth $602,000 after 37 years. That's almost exactly how much someone would need to receive $30,000 per year, or $2,500 per month, of passive income from their portfolio with a 5% dividend yield.
