Most Australians think about investing in terms of either growth or income. But the smartest investors often combine both. They use growth to build their capital base and then switch to income when the time is right.
Starting with $20,000, it is possible to grow your wealth to a point where it can generate an income stream that not only pays but continues to rise year after year. Here's how.
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Growing your base
The first stage is growth. Let's assume you invest $20,000 in a mix of quality ASX shares and ETFs and continue contributing regularly. Over time, with an assumed 10% average annual return (not guaranteed, but in line with long-term share market averages), you could build that portfolio to around $150,000 in a decade.
For example, a $20,000 starter investment and then $500 a month would compound to $150,000 after 10 years.
This is the point at which you can switch strategies — moving from growth-first to income-first.
Switching to dividends
With $150,000 in ASX shares, you could target a dividend yield of 5%. That means an initial income of $7,500 per year, or $625 per month, without eating into your capital.
But here's where the magic comes in. If the ASX shares you own also grow their earnings and share prices by 5% annually (after dividends are paid), then both your portfolio value and your dividend income should rise together.
Income growth
Let's imagine a 10-year period after switching to income. In year one, your $150,000 portfolio pays $7,500 in dividends.
By year five, your portfolio has grown 5% per annum to about $190,000, and your dividends have climbed to around $9,500 annually.
By year 10, the portfolio value would be roughly $245,000, with dividends of $12,250 per year.
That's a significant increase in income over a decade, all while you continue to hold your ASX shares and preserve your capital base.
Which ASX shares?
It is hard to say which ASX shares would be good for income investors in 10 years.
But if you were building this income portfolio today, the likes of Telstra Group Ltd (ASX: TLS), Coles Group Ltd (ASX: COL), and APA Group (ASX: APA) would be examples of the kinds of stocks that can help deliver a mix of income and growth over time.
As for the starter portfolio, investors might want to simply consider an ETF like the iShares S&P 500 ETF (ASX: IVV) to build their wealth over the next decade. Alternatively, there are plenty of ASX growth shares out there that have the potential to grow at even quicker rates.
Foolish Takeaway
Turning $20,000 into an income stream that keeps on growing doesn't happen overnight.
But with patience, discipline, and a focus on high-quality ASX shares, it can be done. Build first, then harvest, and you could set yourself up with a dividend income that rises every year well into retirement.
