Most investors know they can receive passive income in the form of dividends from ASX shares. But most don't envision that they can build an entire second income from them, particularly one worth $50,000 a year.
Although it is difficult to achieve this and requires a large investment of both money and time, it can most certainly be done. Today, let's discuss the easiest way I think any Australian can get to $50,000 in passive income from ASX dividend shares.
The first thing you need to do is make sure your budget has enough spare room in it to afford a regular investment plan. To do this, one needs to ensure that they are spending less than they're earning, and are, apart from mortgages and HECS, debt-free.
Once that's been achieved, the next step is finding the ASX dividend shares to invest in.
Buying ASX dividend shares
There are countless options to choose from in this regard. Many investors opt for a collection of the ASX's most famous and prominent dividend payers. These include Telstra Group Ltd (ASX: TLS), Woolworths Group Ltd (ASX: WOW), or Commonwealth Bank of Australia (ASX: CBA).
Whilst this is certainly a valid path to tread, I think newer investors might be better off sticking with a diversified company or exchange-traded fund (ETF). These investments typically pool other ASX dividend shares within an underlying portfolio and look after them on your behalf.
Some examples of these investments include listed investment companies (LICs) like Argo Investments Ltd (ASX: ARG) or the Australian Foundation Investment Co Ltd (ASX: AFI).
Other investors might prefer a dividend-focused ETF, such as the Vanguard Australian Shares High Yield ETF (ASX: VHY).
All you need is one of these funds, and you're off to the races.
It's not a sprint race though, but a marathon. Building up an income stream as quickly as possible requires regular investing and the reinvestment of dividends.
There are no shortcuts here. It's simply a matter of the more you invest, and the more frequently you do so, the faster you'll get to your goal.
Many investors worry about timing the market, about 'buying low' and 'selling high'. This is almost always a mistake. I think a better creed for investors to hold to is that 'the best time to invest was 10 years ago, the second best, right now'.
Contrary to what you might see in the media, markets go up far more often than they go down. As such, we should all endeavour to invest as much as we can, as soon as we can.
Buy more shares, get a higher second income
Now, if you buy any of the investments listed above, you'll start receiving dividend income right away. It might be tempting to spend this or keep it in your savings account. But if you wish to build wealth (and passive income) as fast as possible, consider just ticking the 'reinvest my dividends' box when you initially buy the shares. This ensures that your dividends will buy more shares, which will then pay you even more dividends and so on, accelerating the compounding process.
Now, let's talk numbers. To get to $50,000 per year in passive income, let's assume that your investment offers a 4% dividend yield. By that logic, you'll need a portfolio worth just over $1.2 million before you can stop those dividends reinvesting and enjoy that passive income.
If your investment earns 8% per annum, it will take about 28 years investing $1,000 every month to get there. Again, you can speed this up by either increasing your regular investments, or by finding higher-returning assets. To illustrate, increasing your investment to $2,000 a month brings your wait time down to about 20 years.
But if one starts young enough, this strategy can certainly help fund an early retirement.
