Building up a passive income stream is no easy feat. Having money pouring into your bank account with no labour or effort required is the dream. But it is easier to dream than do.
Luckily for would-be passive income earners, shares are an ideal investment vehicle to help you build up passive income and move closer toward financial independence. Not only do many ASX shares pay dividends (a form of passive income), but many also issue franking credits as well, which can also help to boost your income even further.
$20 a week is a reasonable target for most Australians to invest each week. Hopefully, that won't have a meaningful impact on a standard of living and can be repeated each week.
$20 a week equates to roughly $80 a month, or more accurately, $1,040 a year.
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How to get passive income from ASX dividend shares (or ETFs)
If I wished to build up a passive income stream from ASX shares, the first investment I would look to is an exchange-traded fund (ETF) specialising in dividend income. One such fund is the Vanguard Australian Shares High Yield ETF (ASX: VHY).
This ETF deliberately targets a stream of passive dividend income for its investors. It does so by only holding high-yielding ASX dividend shares in its portfolio, from which it can pass income and franking onto its investors.
Some of its current top holdings include dividend beasts like BHP Group Ltd (ASX: BHP), Woodside Energy Group Ltd (ASX: WDS) and National Australia Bank Ltd (ASX: NAB).
So over the past 12 months, this Vanguard ETF has forked out distributions worth a total of $3.84 per share. At today's unit price of $69.28 (at the time of writing) for the Vanguard Australian Shares High Yield ETF, that gives it a healthy distribution yield of 5.54%.
It's worth mentioning here that Vanguard ETFs offer zero brokerage fees and a low minimum investment amount. Other ASX share investments will differ, so be mindful of regular brokerage fees potentially impacting your returns.
By the numbers…
If we invested $20 a week in the Vanguard Australian Shares High Yield ETF for a whole year, a hypothetical investor could pull around $57.62 in dividend income by the end of the year. If that investor spent 10 years putting $20 a week away, this would rise to $576.20 in dividend income per year. That would be $1,152.40 a year after 20 years.
If our investor reinvested their dividends each year, this would get a boost up to approximately $1,212.97 in dividend income per year.
Of course, this assumes that the dividend distributions from the high-yield Vanguard ETF remain the same over this two-decade period, which is highly unlikely.
Chances are that this 20-year period will see the annual distributions from this ETF increase substantially as well, leaving our investor with even more passive income.
That's enough to make a meaningful difference to a retirement.
