Passive income is a great way for investors to build financial security, benefit from compounding, and create another income stream without working any extra hours.
The error that many investors make is thinking they need a million dollar investment portfolio to make it worth it.
The truth is, you don't need to spend millions, or even hundreds of thousands. Any level of passive income can help contribute to your financial independence and also create a buffer against sharemarket volatility.
So, what could that passive income actually look like?
Let's break it down, using a $50,000 investment portfolio as an example.
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What passive income can I earn off a $50,000 portfolio?
The easiest way to calculate your passive income is by multiplying your total portfolio value by your dividend yield.
But, the tricky part is that the answer varies widely depending on the dividend yield of your portfolio.
For example, $50,000 x 3% = $1,500 per year in dividend payments.
But if your portfolio has a dividend yield of around 6%, your passive income will be double the size. That's because $50,000 x 6% = $3,000 per year in dividend payments.
And so on. As your dividend yield increases, the passive income you can earn off your $50,000 portfolio also increases.
These figures are based on cash dividends before any tax or franking credit benefits.
Of course, this type of money isn't going to become a primary income stream, but it'll certainly help create an extra buffer.
Which ASX shares will earn me $2,000 per year in passive income?
To earn an annual passive income of around $2,000, your portfolio will need to yield around 4%.
There is a huge range of ASX dividend shares available that pay around that level, so it's certainly achievable.
For example, Argo Investments (ASX: ARG) pays just a little over the 4% mark at the time of writing. As does WCM Global Growth (ASX: WQG).
Major bank Westpac Banking Corp (ASX: WBC) pays a dividend yield of around 4.2% to its shareholders.
ANZ Group Holdings Ltd (ASX: ANZ) and Transurban Group Ltd (ASX: TCL) both pay a little more. Their dividend yields are around 4.6% and 4.7%, respectively.
Of course, ideally, you'd want a mixture of shares that combine to make a 4% yielding portfolio for diversification reasons, rather than a portfolio of only one stock.
What if I want to earn closer to $4,000 per year? Is that possible?
It's also possible to earn a little more. To earn $4,000 in passive income, you'd need a portfolio that yields 8%.
Again, there are plenty of ASX shares that yield around this level, but it's worth noting that a higher yield generally comes with higher risk.
The Metrics Income Opportunities Trust (ASX: MOT) is a listed investment trust (LIT) which can give investors direct exposure to private credit investments. The Trust targets a cash yield of 7% per year. It has a total target return of 8% to 10% per year, net of fees and expenses.
Charter Hall Long WALE REIT (ASX: CLW) and WAM Microcap (ASX: WMI) both yield in the low 7%.
And if you're looking to target higher-yielding ASX shares, there are stocks like intellectual property (IP) service provider IPH Ltd (ASX: IPH), which yields around 9.6% and Centuria Office REIT (ASX: COF), which yields around 11.4%, at the time of writing.
Again, I wouldn't suggest investing solely in high-yield shares in order to earn a higher income. But it's possible to create a portfolio mix including high-yield ASX shares and more reliable or defensive assets to get an over 8% yielding portfolio.
