For many Australians, the idea of generating a second stream of income without having to work extra hours is an appealing one.
The good news is that thanks to the Australian share market, it is entirely achievable.
By investing in high-quality ASX shares, it is possible to build an income stream that delivers consistent cash flow into your bank account.
One popular target is to earn a second income of $500 a month—or $6,000 a year. But how much capital would you need, and how should you go about achieving it?
Let's break it down.
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Building a second income
If you are starting from zero, you are going to have to put money into the share market before you can start taking it out of it.
Based on a dividend yield of 5%, which is very achievable with ASX shares, you would need to grow your ASX share portfolio to be worth approximately $120,000. That would generate a second income of $6,000 annually.
If you are already lucky enough to be sitting on this amount of money, then you can start thinking about generating income. For those that aren't as fortunate, then let's look at getting to this figure.
Growing your portfolio
How long it takes to get to your goal of $120,000 will depend largely on how much spare capital you have.
If you can afford to invest $500 a month into quality ASX shares each month, it would take just over 11 years to reach your target if you generated an average annual return of 10%.
Investors that can afford to put $1,000 a month into their portfolio would get to $120,000 in 7 years, all else equal.
The key at this stage is to forget about your second income and focus on growing your wealth with quality ASX shares that have strong business models and positive growth outlook.
Companies such as ResMed Inc (ASX: RMD) and Goodman Group (ASX: GMG) spring to mind, as does the popular Betashares Nasdaq 100 ETF (ASX: NDQ).
Once you have reached your goal, you can transition toward income-generating shares.
Which ASX shares offer strong yields?
It is difficult to say which ASX dividend shares will be the ones to buy in 7 or 11 years.
But if it were today, you might look at dividend payers such as APA Group (ASX: APA), Accent Group (ASX: AX1), Super Retail Group Ltd (ASX: SUL), Telstra Group Ltd (ASX: TLS), or BHP Group Ltd (ASX: BHP).
Alternatively, you could buy a collection of high-yield ASX dividend shares with the Vanguard Australian Shares High Yield ETF (ASX: VHY). It is an easy and diversified way to turn your capital into a second income.
Foolish takeaway
Building a second income of $500 a month isn't an overnight process, but with patience and a consistent investment approach, it certainly is possible.
Whether you're starting small or already on the way, the combination of compounding returns and dependable ASX dividend shares can help turn your income ambitions into reality.
