The ASX share world is a great way to unlock investment income, although it takes money to earn money. With ASX dividends, Aussies can replace their salary.
I think receiving dividends is very appealing, all we need to do is invest once and then we can receive pleasing payments again and again.
We don't need to actively manage that investment – it's not like a residential property with tenants. We can just sit back and watch the money roll in.
So, how to go about replacing a salary with ASX dividends? I think there are three steps.
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Like I said at the start, we need to invest money to start making some passive income with ASX dividends. It may take investing quite a lot to unlock that cash flow, depending on how much you earn.
However you go about it, we need to find some savings, which usually comes about from spending less than we earn.
But, pleasingly, the less we spend each year, the smaller the investment income total we'd need to aim for. For example, if two people earn the same, and person A spends $50,000 per year and person B spends $60,000 per year, person A could replace their salary quicker.
Once we've got those savings, we can put the money to work in the stock market.
Identify your strategy
There are a few different avenues to go with trying to replace a salary with ASX dividends.
The most obvious answer, in my mind, is to go for ASX dividend shares that are delivering earnings growth, which can help deliver capital growth and dividend growth. These investments can help us grow our wealth organically. Some of the relevant businesses that I think of include Washington H. Soul Pattinson and Co. Ltd (ASX: SOL), Brickworks Ltd (ASX: BKW), GQG Partners Inc (ASX: GQG), Wesfarmers Ltd (ASX: WES) and Premier Investments Ltd (ASX: PMV).
Another avenue to consider would be buying investments with strong capital growth potential and then selling them for ASX dividend shares once you've reached the desired total portfolio value to make the switch. Some of my favourite options right now for growth include VanEck MSCI International Quality ETF (ASX: QUAL), Betashares Global Quality Leaders ETF (ASX: QLTY), VanEck Morningstar Wide Moat ETF (ASX: MOAT), VanEck MSCI International Small Cos Quality ETF (ASX: QSML), Tuas Ltd (ASX: TUA) and Siteminder Ltd (ASX: SDR).
Invest and benefit from compounding
Investing and owning them for the long-term is a good strategy.
If someone were starting today from $0 and was able to invest $1,000 per month, they'd reach $1.45 million in 27 years if it compounded at an average of 10% per year. If the portfolio balance had a dividend yield of 5%, then a $1.31 million portfolio would generate annual dividends of $72,500. For me, that would be a solid outcome. If someone could invest more than $1,000 per month, then they'd end up with a much larger figure in the future.
