The ASX share market can generate passive income for investors, whether they're 18 or 80. Some people may be worrying about how much money they have if they're 40 years old and have no savings.
Sure, it may have been better to invest a decade ago. But compounding can start today and help investors build a lot of wealth.
If we're thinking about retirement with a target age of 65 or 70, there are still 25 years or 30 years of wealth-building to go.
The share market can grow a lot in 30 years. The ASX share market has historically grown by 10% per year over the ultra-long term. Over 10 years, an investment of $1,000 can grow into around $2,600 if it grows by 10% per annum.
By putting money to work in the ASX share market, we can grow the nest egg and let the investment compounding do a lot of the wealth-building.
Saving $5 a day to invest
Investors can invest a much smaller amount with ASX shares compared to buying a property that can take a deposit of tens of thousands of dollars. However, I need to point out we need to save more than $5 to invest.
Saving $5 a day is equivalent to $35 per week or $1,825 per year.
So, let's imagine that we decide to invest once per year with a $1,825 investment. Doing just one investment means we can save on brokerage fees and also that cash can sit in a bank savings account earning interest until it's invested for passive income.
But, just to be clear in the example I'm about to use, I haven't factored in the benefit of interest generated into the below calculation, so the wealth-building effect could be stronger, depending on what returns the share market makes.
Vanguard MSCI International Shares Index ETF (ASX: VGS) is one of the most popular ASX exchange-traded funds (ETFs) and could be an easy-wealth-building tool. It invests in the global share market, offers a lot of diversification and has returned an average of more than 10% over the past five years and since inception (in November 2014), though past performance is not a guarantee of future performance.
After 30 years of investing $1,825 per year and growing at 10% per annum, it could grow to $300,000 according to the Moneysmart compound calculator.
Turning that into passive income
Having a $300,000 portfolio would be a fantastic result, in my opinion.
According to Vanguard, the Vanguard MSCI International Shares Index ETF has a dividend yield of 2.1% at the moment. A $300,000 portfolio would generate $6,300 of annual passive income.
So, I'd steadily move some of that portfolio value into higher-yielding ASX dividend shares to target $7,800 of annual passive income, or whatever the target is.
I don't know what the best ASX dividend shares will be in 30 years. However, if I had to guess which S&P/ASX 200 Index (ASX: XJO) shares could still be good dividend options in three decades, I'd pick a few different names.
Telco Telstra Group Ltd (ASX: TLS) could be one choice because I think data and an internet connection will still be important.
Diversified businesses Wesfarmers Ltd (ASX: WES), owner of Bunnings, Kmart and WesCEF, and Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) can adjust their portfolios to future-focused businesses. They have the intention to grow the dividend for shareholders.
I'd also guess Brickworks Limited (ASX: BKW) could be good – I think building products will still be important, while its investments in property and Soul Pattinson could help continue its long-term dividend stability.
