Owning ASX shares can be very rewarding for a number of different reasons. Capital growth is exciting, but how good does it sound to have passive income rolling into the bank account?
We need to work to generate earnings, whether as regular employees, small business owners, or CEOs of Australia's biggest companies.
Dividends require no extra effort to receive $10,000 compared to $1,000. They're a very scalable type of income.
So, how do we unlock bucketloads of cash? There are a few steps I'd follow.
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Identify the goal and start saving
Each household has its own income level, so it's difficult to say what the target should be exactly.
However, the Australian Bureau of Statistics (ABS) recently told us that the median weekly earnings of Australian employees in their main jobs were $1,396, so I think a goal of $75,000 would be a good annual target.
Obviously, we can't go from $0 to instantly earning $75,000 in passive dividend income. We'll need to start saving some money to invest and begin compounding our portfolio to a much larger figure.
Each household needs to figure out how much they can or want to set aside for investing.
Invest and compound
I'm going to use a very round figure to demonstrate the power of sticking with a goal and regularly investing.
If you invested $1,000 per month for 30 years and it grew by an average of 10% per year (the ultra-long-term return on the share market), it would become worth $1.97 million! Someone who is 22 today could see their portfolio become almost $2 million by the age of 52.
Of course, investing more per month and/or the portfolio returning more than 10% could deliver $2 million even quicker and help unlock that passive income. For example, investing $2,000 per month and returning 10% per annum would grow into $2.1 million after less than 24 years.
Patience is required, but these numbers show how ASX shares can reach much larger numbers over time. In my first example of investing $1,000 per month, $1.6 million of the $1.97 million was made by portfolio returns – only $360,000 of the amount was from contributions of our own money.
Where to invest?
The easiest way to invest could be to pick exchange-traded funds (ETF) that give investors a diversified portfolio in a single investment. I believe international shares could be the way to go because those companies typically have their eyes on a global earnings growth runway, giving them a lot of room to expand.
Some ASX ETFs to consider could be Vanguard MSCI Index International Shares ETF (ASX: VGS), VanEck MSCI International Quality ETF (ASX: QUAL), Betashares Global Quality Leaders ETF (ASX: QLTY), BetaShares Global Sustainability Leaders ETF (ASX: ETHI) or VanEck Morningstar Wide Moat ETF (ASX: MOAT).
If you reached $2 million, or less if the goal is a lower annual passive income amount than $75,000, then you could create cash flow by selling a small portion of the portfolio balance.
To get $75,000 per year with $2 million, you would need to sell 3.75% of the portfolio balance each year. The long-term capital growth of the ETFs could end up being stronger than 3.75% in future years, so investors could become wealthier as time goes on.
Of course, I'm a firm believer in the potential of ASX growth shares and ASX dividend shares for returns. Depending on the dividend yield, owning ASX dividend shares for passive income could also be a smart move once an investor reaches the desired portfolio value.
