Income investing involves targeting strong dividend shares to generate passive income.
Having a reliable passive income stream can be a pathway to early retirement, provide funding for holidays or big purchases, or to supplement your superannuation.
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What kind of investor should be targeting passive income?
Passive income is often a key priority for retirees, particularly those looking to supplement their superannuation and create a more reliable income stream.
However, income-focused investing isn't just for retirees.
Investors at other stages of life may also benefit from building a portfolio that generates regular dividends and distributions, whether to help fund living expenses, reinvest and compound returns, or create greater financial flexibility over time.
For ASX investors, companies with a track record of paying sustainable dividends can therefore appeal to a broad range of investors – not just those already relying on their investments for income.
With that in mind, here is a hypothetical pathway to generating $2,000 a month in passive income with just two trades.
The portfolio
Generating $2,000 a month in passive income will require some significant capital investment.
However, it is certainly achievable with a combination of two ASX ETFs.
The strategy is to target high-yield ASX ETFs that pay monthly distributions.
The two that stand out are BetaShares Australian Top 20 Equities Yield Maximiser Complex ETF (ASX: YMAX) and Betashares Australian Dividend Harvester Fund (ASX: HVST).
The YMAX fund aims to generate attractive monthly income and reduce the volatility of portfolio returns by implementing an equity income investment strategy over a portfolio of the 20 largest blue-chip shares listed on the ASX.
Meanwhile, the HVST fund follows a rules-based 'dividend harvest' strategy that seeks to maximise its exposure to dividend-paying Australian shares.
The YMAX fund currently offers a 12 month gross distribution yield of 8.6%.
The HVST fund currently offers a 12 month gross distribution yield info 7.1%.
How much do you need to invest?
For a simple hypothetical calculation, we can assume the portfolio is split equally between the two ETFs.
A split allows some breathing room should one fund reduce its distribution.
With an average gross distribution yield of 7.85%, an investor would need around $305,700 invested to generate $24,000 a year, or $2,000 a month, in gross income.
Put simply, $152,850 invested in each fund would generate approximately $12,000 per year from each fund, assuming the stated yields were maintained.
Of course, distributions can change over time, and this example doesn't account for tax, franking credits, brokerage or changes in the ETFs' market prices.
Foolish takeaway
Most investors won't have $300,000 or more sitting around ready to invest, and that's okay.
Building a meaningful passive income stream is typically a long-term process rather than something that happens overnight.
By making consistent contributions to income-generating investments and reinvesting distributions, investors can gradually build their capital base and move closer to their passive income goals.
