At present Commonwealth Bank of Australia (ASX: CBA) offers interest rates of 1.25% per annum on term deposits for $50,000 or more. This is line with what is on offer with the rest of the big four banks.
This means that if you wanted to generate a passive income of $50,000 through term deposits, you'd need to invest a whopping $4 million into them.
Unless you already have a large amount of cash sitting in your bank account, this simply isn't feasible.
How else can you generate $50,000 of passive income?
If you have retired and have managed to save up $1 million during your career, then you can earn $50,000 passive income by investing in ASX shares.
Whilst you could opt to put the money into some of the banks and earn a yield of over 6%, a safer bet might be to invest in the Vanguard Australian Shares High Yield ETF (ASX: VHY).
As the name implies, this exchange traded fund provides investors with exposure to some of the highest paying dividend shares on the Australian share market.
This diverse group of 60 shares includes the big four banks, mining giant BHP Group Ltd (ASX: BHP), and telco company Telstra Corporation Ltd (ASX: TLS).
Its units currently provide investors with a dividend yield of 5.3%, which means an investment of ~$940,000 would provide you with dividends of $50,000 right now.
But what about younger demographics?
If you have time on your side and are prepared to be patient, you'll be very thankful later in life.
This is because if you invest in dividend-paying shares that have strong growth potential, a much smaller investment could one day generate even more dividends than your original investment.
Take for example, biotherapeutics giant CSL Limited (ASX: CSL). After adjusting for stock splits, CSL shares hit the ASX boards in the 1990s at 76.6 cents per share.
This year the market darling paid shareholders an unfranked dividend of approximately $2.66 per share. This is a massive 347% yield on cost for those that bought shares at its IPO.
What this means is that an investment of just $14,400 in its shares at its IPO would now be generating $50,000 in dividends.
But which shares will be the ones to do this in the future? I think Altium Limited (ASX: ALU) and Webjet Limited (ASX: WEB) could be future income stars. Both have outstanding long-term growth potential and are also growing their dividends at a strong rate each year.
