Imagine receiving $50,000 a year without having to work for it.
That could make a huge difference to your lifestyle, particularly if you are approaching retirement or hoping to work fewer hours.
And while building a portfolio capable of producing this much income will take time, ASX shares could help you get there.
Here's how it could be done.
Image source: Getty Images
Start by building wealth
The first thing to understand is that a $50,000 passive income requires a substantial investment portfolio.
If the goal is to generate this income from dividends with an average dividend yield of 5%, you would need approximately $1 million invested.
That might sound intimidating, but nobody needs to start with $1 million.
In fact, the early years should probably be focused on growing the portfolio rather than generating income.
This could mean investing in quality ASX growth shares such as Goodman Group (ASX: GMG), ResMed Inc (ASX: RMD), and Xero Ltd (ASX: XRO).
Blue chip shares and exchange traded funds (ETFs) could also help build wealth over time.
The aim would be to own investments capable of increasing in value over many years, while reinvesting any dividends received.
Let compounding do its work
Regular investing can make a significant difference to the journey.
For example, investing $500 a month and achieving an average annual return of 10% could grow a portfolio to approximately $1 million in 30 years.
Increase that to $1,000 a month and the same target could be reached in around 23 years.
These returns are not guaranteed, and actual returns will vary from year to year, but they demonstrate how powerful regular investing and compounding can be.
Over time, an increasing portion of the portfolio's growth can come from investment returns rather than new contributions.
Turn the portfolio into an income generator
Once the portfolio approaches $1 million, investors could start shifting their focus towards ASX dividend shares.
That could include infrastructure companies such as APA Group (ASX: APA) and Transurban Group (ASX: TCL), which own assets capable of generating cash flow over long periods.
Property investments such as HomeCo Daily Needs REIT (ASX: HDN) and Charter Hall Long WALE REIT (ASX: CLW) could provide another source of income.
Established businesses such as Woolworths Group Ltd (ASX: WOW) and Wesfarmers Ltd (ASX: WES) could also have a place in the portfolio.
And for investors who would rather not select every dividend share themselves, an income-focused ETF such as the Vanguard Australian Shares High Yield ETF (ASX: VHY) could be worth considering.
Final word
Overall, I think this demonstrates that the share market can be a great place to generate a passive income.
Investors just need a combination of patience, capital, and good investments. The rest will happen in time.
