There are many ways for Aussies to generate passive income these days.
But one of the best could still be through investing in ASX shares.
By taking advantage of compounding and dividend payouts, investors can pull in a nice income boost each month.
But what would an investor need to do to receive a monthly pay check of $500 from ASX shares? Let's run the numbers.
Generating $500 of passive income from ASX shares
Firstly, let's look at dividend yields.
A 5% dividend yield is easily achievable for investors with ASX shares. There are plenty of quality companies out there offering yields in or around this level, allowing you to easily build a diversified income portfolio.
A few examples of this could be intellectual property services company IPH Ltd (ASX: IPH), rural property company Rural Funds Group (ASX: RFF), and fleet management and salary packaging company Smartgroup Corporation Ltd (ASX: SIQ), at present. Both offer trailing yields well in advance of 5%.
Generating $500 a month in passive income is the equivalent of $6,000 a year.
To pull in this level of income from an ASX share portfolio with a 5% yield means that you will need a portfolio valued at $120,000.
If you are lucky enough to be sitting on this amount of money, then you can put your funds to work immediately and watch the passive income come rolling in. But what if you're just starting out with investing?
Starting at zero
The good news is that it isn't as hard as you might think to build a $120,000 investment portfolio. All you need is time, some spare capital, and patience.
The share market has traditionally provided investors with a 10% per annum total return. While there is no guarantee that it will continue to do this in the future, I think it is fair to base our assumptions on this level of return.
With that in mind, an investor that can afford to put $500 into high-quality ASX shares each month would see the value of their investments grow to $120,000 in approximately 11 years.
Whereas if you are able to afford a $1,000 monthly investment, you could get there in just 7 years if you averaged a 10% per annum return.
Once you have your portfolio at the desired level, you can then sit back, put your feet up, and watch the passive income come flooding in.
