So you have $10,000 in savings and you'd like to build a passive income stream? Congratulations. ASX shares are one of, if not the, best asset classes to use if you'd like a secondary income source. So you've come to the right place.
ASX shares are a top choice for passive income for a few reasons. For one, history has shown that ASX investors can receive meaningful and inflation-beating passive income. You can't say the same when it comes to other, 'safer' options like term deposits these days.
Additionally, passive dividend income from shares can be far more tax-effective than other sources, thanks to the benefits of franking credits.
However, building a $500-a-month stream of passive income from $10,000 sadly can't be done overnight.
Saying that, it most certainly can be done. Let's discuss how.
Right off the bat, $10,000 is not enough to secure a meaningful stream of passive, secondary income from ASX shares. If you buy $10,000 worth of an income share that pays out a 4% dividend yield, you can expect to receive $400 a year in passive dividend income. That's about $33 a month – obviously well below our $500 goal.
Let's assume one can get a 4% yield from a share portfolio. That's a reasonable assumption to make. Some ASX dividend shares pay yields above 4%, such as Westpac Banking Corp (ASX: WBC). Some others, such as CSL Limited (ASX: CSL), pay below 4%.
But that's about the rough average of what you can expect from an ASX dividend share. Indeed, it's around the yield that an ASX 200 index fund, such as the SPDR S&P/ASX 200 Fund (ASX: STW) has averaged historically.
How much do you need to invest in ASX shares to gain a passive income of $500 a month?
In order to secure a cash flow of $500 a month (or $6,000 a year), one would need to amass a total ASX share portfolio worth around $150,000 (4% of $150,000 is $6,000).
If you simply left your $10,000 in an ASX 200 index find like the SPDR ASX 200 Fund, and it continued to generate an average return of 7.81% per annum (which this fund has since its inception in 2001), it would take approximately 35 years before our portfolio could start yielding $6,000 per annum in passive income. And that's assuming we reinvest our dividends every step of the way as well.
Past performance is no guarantee of future returns of course. So in reality it could take even longer, or if we're lucky, a little sooner.
But say we upped the ante, and instead of leaving our $10,000 alone, we added an additional $100 per week ($400 a month) to our passive income portfolio. Then, instead of waiting 35 years, we would only have to invest for 14 before gaining that second income of $500 a month.
If our investor was able to pull out all of the stops and upp their weekly contributions to $200, we're now only looking at around nine-and-a-half years.
So building a passive income stream of $500 a month isn't easy on the share market. But it is certainly achievable with a bit of patience, time and discipline. Some things take time to grow, and passive income is one of those things.
