For many working-age Aussies, a wage is the main (and only) source of income. That's better than having no income at all, but wouldn't it be great to create a second income from ASX shares?
There are only so many hours in a week, so wage earnings are limited by how much we work. Creating a portfolio of ASX shares that are making passive income would significantly improve our financial stability.
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What amount of a second income does someone need?
I don't know about you, but when I'm in my 70s, I don't want to be in a position where I have to work. I have a goal of generating enough annual dividends which can cover my core life expenditure. At that point, I'd be financially independent!
That's a large, long-term goal which is a long time away.
When I first started investing in ASX dividend shares, I thought of the second income it produced as just budget-boosting dollars that unlocked additional spending in discretionary categories. Passive income returns don't necessarily need to be locked away for decades like superannuation.
A $1,000 investment could create enough annual income to pay for a couple of takeaways or a restaurant meal with friends.
Building an ASX dividend share portfolio of $10,000 could mean making enough annual passive income to pay for an overnight stay (and associated spending) somewhere.
Or, the money could just be used to give more breathing room in someone's budget that year.
If we regularly invest spare money into ASX shares, we could quickly find that plenty of money is hitting our bank accounts each year.
The power of a dividend yield
I really like ASX dividend shares for creating a second income because you don't need to take on debt to do it (unlike buying a property). It can be done with small, regular investments.
Most importantly, businesses can pay passive income without necessarily hurting the ability to increase the dividend next year. That's why I prefer ASX dividend shares to term deposits – there is growth potential for the income and capital value.
If I were investing with income in mind, I'd only want to buy stocks I have good confidence would deliver a similar (or larger) payout each year. I'll run through a few examples of compelling names for a second income.
Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) is a diversified investment house that has increased its annual dividend every year for the past 27 years in a row. At the time of writing, it has a grossed-up dividend yield of 3.8%, including franking credits.
Wesfarmers Ltd (ASX: WES) is a major blue-chip that owns Bunnings, Kmart, Officeworks and Priceline. It has a focus on shareholder returns, with a goal of regularly growing the dividend. At the time of writing, it has a grossed-up dividend yield of 3.6%, including franking credits.
Future Generation Australia Ltd (ASX: FGX) is a listed investment company (LIC) that doesn't have any management fees, instead donating 1% of net assets each year to youth charities. The fund-of-funds portfolio strategy gives significant diversification. It has a grossed-up dividend yield of 7.7%, including franking credits, at the time of writing. The ASX dividend share has increased its annual payout each year over the past decade.
Telstra Group Ltd (ASX: TLS) is Australia's leading telecommunications business with a market-leading network that attracts more customers each year. Its growing mobile earnings are helping fund a growing dividend and it has a grossed-up dividend yield of 5.6%, including franking credits, at the time of writing.
Of course, these aren't the only ASX shares worth investing in for a second income.
