Passive income gives investors regular and ongoing cash flow without having to do any work.
Not only do passive income shares on the ASX help to build your wealth over time, they help to diversify your portfolio and give you more financial freedom in terms of your time, career choices and when you might want to retire.
The question is, how much do you need to invest in ASX shares to earn the passive income you want?
Here's a quick calculation to help.
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Calculation breakdown
To work out how much you need to invest you need to divide your intended annual income by the dividend yield of your investment.
For example, earning $1,000 per month in passive income equates to $52,000 per year in dividend payments.
The problem is that the answer varies depending on the dividend yield of the ASX shares you'd be buying.
ASX shares yielding 4% would require a $1.3 million investment, while shares yielding 5% would need around $1 million.
ASX dividend shares which pay out a higher yield of around 6% would require an investment of around $870,000 in order to reach a $1,000 per month passive income goal.
For high yield shares offering 7%, you'd only need to invest $740,000 in order to earn your $1,000 per week passive income.
These calculations assume dividends are paid consistently and exclude any impact from franking credits.
Great, but how do I build this level of portfolio?
For many investors, the problem isn't finding the ASX shares paying the dividend yield you want, but rather working out how to get to that level of portfolio in the first place.
The good news is that getting to a $1 million portfolio, which is roughly what you'd need to earn $1,000 per week in passive income on 5% yielding shares, is more achievable than you'd think.
The trick is that it takes consistency and lots of patience.
There aren't many Australian investors which could drop $1 million in the sharemarket at once. But a regular contribution of $500 per month (or more) is a great start.
Then compounding does the heavy lifting.
If you're able to consistently invest $500 per month it could take around 40 years to reach a $1 million portfolio. But hike that to $1000 per month and it'll easily cut 10 years off your timeline.
Another way to shave back the time needed to reach your goal is to buy some shares with higher dividend yields, add lump sums into your portfolio where you can, or slowly increase your investments over time.
