Imagine being handed $500 each month for doing nothing at all. That's the beauty of passive income, a major benefit of investing in ASX dividend shares.
Fortunately, I truly believe anyone with a few hundred dollars a month of spare cash can build up a passive income portfolio now and reap the rewards later without breaking the bank.
However, investing in any and all ASX dividend stocks could prove detrimental. Here're five steps I'd take if I were aiming for $500 of monthly passive income, starting from scratch in 2023.
#1 commit to regularly investing
Investing involves just that, investing. To become an investor, one must have cash to begin with.
And while sinking a few hundred into the stock market here and there can build wealth, reaching a set goal is likely better done by employing a consistent investing strategy.
I believe committing to investing a set amount, say $500 a month, into ASX dividend shares is the first step to building a reliable dividend stream.
#2 know the ins and outs of ASX dividends
As alluded to above, running blindly into the stock market is rarely the best way to set yourself up to benefit from your investments.
So, I'd argue the second step to building passive income with ASX shares is to understand how dividends work.
If a company is generating more cash than it has a use for, it can hand the excess to its shareholders. The portion of such free cash flow that an investor receives is a dividend.
Thus, the best ASX dividend shares are generally those with strong, consistent, and defensive cash flows.
#3 hunt down ASX passive income opportunities
On that note, the next step is finding ASX shares worth buying.
There's no single rule that makes one stock a better buy than another. That often comes down to an investor's preference, existing knowledge, and risk tolerance.
However, if I were investing for passive income, I'd likely stick to S&P/ASX 200 Index (ASX: XJO) shares that I understand and that boast a history of turning consistent cash flows into decent dividends.
On top of that, I would ensure they're trading at a good price before buying them. Of course, that means I'd be in for a decent amount of homework. But there is a shortcut.
An investor can always turn to an exchange-traded fund (ETF) like the Vanguard Australian Shares High Yield ETF (ASX: VHY) to get a hold of a diverse range of dividend paying stocks.
#4 invest in a passive income portfolio
After considering the best path forward for themselves, I'd advise an up-and-coming passive income investor to stick to their guns. The market tends to ebb and flow but has historically always gone up.
While it might be tempting to halt an investing strategy when the market is falling, doing so can be detrimental to an investor's long-term goals.
Speaking of the long-term, if I were to be investing $500 a month, it would take me a while to reach $500 of monthly passive income ($6,000 of annual passive income).
My portfolio of ASX shares would need to be worth $120,000 before I could realise $6,000 of passive income each year, assuming a 5% dividend yield. That's why I would reinvest my dividends until I reach my goal.
By investing $500 a month and using my dividend income to buy more shares, I could compound my returns, thereby growing my portfolio to $120,000 in a little over 14 years.
#5 regularly review and adjust
Finally, building an ASX passive income portfolio is rarely a 'set and forget' endeavour. Nearly everything changes over time, and companies listed on the ASX are no exception.
If I were relying on ASX shares for passive income, I'd keep an eye on their businesses and the environment they operate in to make sure they make good investment sense now and into the future.
