ASX shares are among the most effective assets at generating income for investors. They could be a great choice to build a second income.
We all only have so much time to work for earnings. It'd be beneficial to have a portfolio of shares paying a growing source of passive income to our bank accounts that we don't have to actively work for ourselves.
How much of a second income could a $20,000 investment pay? That entirely depends on the dividend yield.
For example, if someone's portfolio had a 5% dividend yield, then $20,000 would generate $1,000 of annual income.
That's just the first year, though.
If the payout grew at a compound annual growth rate (CAGR) of 7.5% for the foreseeable future, it would grow into $1,436 of annual income after five years and $2,061 after ten years.
That sounds good, right?
The next question is what to invest in.
Many of the most popular ASX-listed exchange-traded funds (ETFs) aren't known for having good dividend yields. I'll run through some compelling options.
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Portfolio investments
When we think about investing in a particular company, like BHP Group Ltd (ASX: BHP), that money is allocated to just one business.
Wouldn't it be great if we could put our money into an investment and it's already diversified instantly?
There are some investments that can provide a pleasing mixture of both a good dividend yield and capital growth. I'm thinking of investment businesses like Washington H. Soul Pattinson and Co. Ltd (ASX: SOL), MFF Capital Investments Ltd (ASX: MFF), and Future Generation Australia Ltd (ASX: FGX), which have a good long-term record of payout growth. I think these are great options for a second income.
I'll also point out a couple of impressive actively-managed ETFs that target a dividend yield for investors and have strong long-term portfolio performance, such as WCM Quality Global Growth Fund (ASX: WCMQ) and Montgomery Global Equities Fund (ASX: MOGL).
Companies
There are a number of companies on the ASX that derive their earnings from operations.
I'd only focus on businesses that have an attractive long-term future and that have a history of growing their payouts and offer a good dividend yield today.
Some of the most appealing ASX dividend shares, in my opinion, are Telstra Group Ltd (ASX: TLS), Wesfarmers Ltd (ASX: WES), Medibank Private Ltd (ASX: MPL), Pinnacle Investment Management Group Ltd (ASX: PNI), Shaver Shop Group Ltd (ASX: SSG), and APA Group (ASX: APA).
Real estate investment trusts
The final area of investments that could unlock a pleasing second income is real estate investment trusts (REITs) – these are businesses that own significant commercial real estate.
There is a wide variety of REITs that Aussies can buy, including industrial, shopping centres, farms, self-storage, office, social, and healthcare.
Investors can benefit from the rental profits as well as the long-term appreciation of land prices. Some of my favourite REITs for income and capital growth are Centuria Industrial REIT (ASX: CIP), Charter Hall Long WALE REIT (ASX: CLW), Rural Funds Group (ASX: RFF), and Abacus Storage King (ASX: ASK).
