I love the idea of living purely off dividend income to pay for my living expenses, that's what plenty of retirees are already doing. But, we don't need to wait until we're old to experience the benefits of owning ASX shares and generating a second income.
We work a certain number of hours each week and there's an upper limit on that. But, there are other ways to bring money into our bank account. Passive income can come in a variety of sources such as interest, rental income, distributions and dividends.
The companies behind ASX shares are doing their best to make and grow profit each year, which can lead to a pleasing dividend yield and growing payouts.
The great thing about investing in growing businesses is that they are delivering growth for us, which is much more attractive than holding cash in the bank.
I'll demonstrate how investing in ASX shares can create a second income of $10,000 (and more), even if starting from zero.
Investing regularly can deliver a significant nest egg
To start generating a second income from dividends, investing needs to happen. It takes money to make money.
Everyone's finances will look different, but let's say it's possible that someone/a household can save $1,000 per month, however that happens, to put towards ASX shares. Over the long-term, shares have returned an average of 10% per year and I'm hopeful that stocks can deliver that level of return into the future.
Using the Moneysmart compound interest calculator, investing $1,000 per month can turn into $73,000 after five years and $191,000 after ten years. If the portfolio had a dividend yield of around 5.2%, that would generate $10,000 of annual passive income. A lower dividend yield would require a larger portfolio balance, to reach $10,000 of annual passive income, though that could be the better choice.
Of course, that 10% overall return assumes the dividends are re-invested, so if someone wants to make $10,000 as a second income, I'd suggest investing the dividends into buying new shares until reaching the intended portfolio goal. Spending the dividends along the journey could mean it takes longer to reach (for example) $191,000.
Which ASX shares should investors buy for a second income?
It's rare to find an investment that can deliver a good mixture of both a solid dividend yield and good growth.
One of the most common investments for investors who are searching for yield and capital growth is the Vanguard Australian Shares Index ETF (ASX: VAS) which allows us to essentially invest in the Australian share market. Many large Australian businesses are known for pleasing dividend yields. But, I'm not expecting a lot of capital growth in the medium-term from this fund.
Listed investment companies (LICs) that invest in global shares could offer an appealing mix of growth and dividends because they're able to pay out some of the investment gains as dividends. Names like MFF Capital Investments Ltd (ASX: MFF) and WCM Global Growth Ltd (ASX: WQG) are two names worthy of attention with their impressive investment strategies, solid dividend yields and ongoing dividend increases.
In terms of individual S&P/ASX 200 Index (ASX: XJO) shares that could work well, there are two names that spring to mind: investment house Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) and Bunnings and Kmart owner Wesfarmers Ltd (ASX: WES).
I'm optimistic that the names I've mentioned, along with some others, can be solid long-term investments, unlock a second income and invest for the long-term.
