Lifelong passive income for $5 a week? Here's how I'd aim to achieve it with ASX shares

You don't need a fortune to start building a passive income from ASX shares.

| More on:
An ASX dividend investor lies back in a deck chair with his hands behind his head on a quiet and beautiful beach with blue sky and water in the background.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

You might think you need a large savings pile to earn lifelong passive income from ASX shares.

But the truth is you can get started by investing much smaller amounts.

While most of our budgets are being stretched under the current economic conditions, I reckon I could set aside at least $5 a week to invest in ASX shares to reach my passive income goal.

Over time I might increase that amount. But the important thing is to begin diligently putting aside some money each week and cementing that savings habit.

At just $5 a week, I'd have $520 to invest at the end of two years. Or more, if I've been earning some interest on my cash savings.

The next question is, which ASX shares to target for that reliable passive income?

Where to for passive income from ASX shares?

The ASX offers a wide range of dividend shares for investors to choose from.

If I were diving straight in and hunting for individual companies to help deliver my passive income goals, I'd look for stocks that are paying fully or mostly franked dividends. This should allow me to hold onto more of that income when it comes time to pay the ATO its dues.

I'd also focus primarily on S&P/ASX 200 Index (ASX: XJO) dividend shares. That's because these tend to be less volatile than small-caps and often have long track records of regular dividend payouts. There's also more readily available research out there for the larger end of the market.

But even with that available research, it can be difficult for retail investors to sort the wheat from the chaff.

Instant diversification

This is why I might start my passive income portfolio with an investment in the Vanguard Australian Shares High Yield ETF (ASX: VHY).

Created with Highcharts 11.4.3Vanguard Australian Shares High Yield ETF PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.com.au

The dividend-focused exchange-traded fund (ETF) offers me instant diversification with a single stock purchase. The ETF currently holds 76 dividend-paying ASX shares, and it has just under $3 billion in assets under management.

Its top four ASX shareholdings are BHP Group Ltd (ASX: BHP), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB), and Woodside Energy Group Ltd (ASX: WDS).

And fees won't eat too deeply into your passive income stream. VHY charges an annual management fee of 0.25% per annum.

Over the past 12 months, the ETF has paid out $3.41 in dividends (distributions). At the current share price (unit price) of $68.31, that works out to a trailing yield of 5%, 91% franked.

Atop that passive income, VHY's share price is also up 5.8% over the 12 months.

That brings its full-year returns to 11%, with some potential tax benefits.

But I won't pull any of that money out just yet.

Instead, I'll use the magic of compounding and continue to save $5 or more each week to invest in ASX shares, and I'll watch that passive income build over time.

Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Vanguard Australian Shares High Yield ETF. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Dividend Investing

A man thinks very carefully about his money and investments.
Dividend Investing

Buy Fortescue and these fantastic ASX dividend shares with $5,000

These shares have been named by brokers as buys for income investors. Let's see what they offer.

Read more »

an older woman holds a handful of paper money in her hands and looks at them with a slightly crazy smile on her face wearing her spectacles on a string as a lot of older people do.
Dividend Investing

I rate these 2 high-yield ASX dividend stock as buys

These businesses could pay big passive income.

Read more »

Woman and man calculating a dividend yield.
Dividend Investing

With the 13% dividend yield, is the GQG share price a buy?

This stock has a huge dividend yield. Does it offer more than that?

Read more »

an older couple look happy as they sit at a laptop computer in their home.
Dividend Investing

Forget term deposits and buy these ASX dividend stocks

Analysts think these shares could be top alternatives to term deposits.

Read more »

A young boy points and smiles as he eats fried chicken.
Dividend Investing

1 ASX dividend stock down 41% I'd buy right now

This stock could produce some tasty returns.

Read more »

Excited couple celebrating success while looking at smartphone.
Dividend Investing

2 fantastic ASX dividend shares to buy while they are cheap

Let's see why brokers think these shares are buys for income investors.

Read more »

A mature woman holds a plate of cake and licks her thumb.
Dividend Investing

Want a 5% yield from US stocks like Amazon? Buy this ASX dividend share

It's possible to have your cake and eat it too.

Read more »

Man looking amazed holding $50 Australian notes, representing ASX dividends.
Dividend Investing

5 top ASX dividend shares to buy next week

Analysts have good things to say about these shares. Let's see what they offer.

Read more »