How I'm aiming to turn an empty ASX share portfolio into passive income of $40,000 a year

I have an investment income goal I'm working towards.

| More on:
A couple lying down and laughing, symbolising passive income.

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

Investing in ASX shares can be a great way to build passive income through dividends, distributions, franking credits and the fact that businesses can deliver compounding growth.

One of the best things about investing in ASX shares is that we can start with a relatively small amount of money, whether someone is aged 18 or 60. Many online brokers have a minimum investment amount of just $500. It can take tens of thousands of dollars for a deposit to buy a property.

It doesn't take that long for small amounts to grow into much larger amounts, and we don't need to use any debt to do it, either.

My passive income goal

I like the idea of building up my passive income enough so that it covers all the expenses my household would want to (frugally) spend, even if we weren't bringing in any dollars from working.

I'm not exactly sure what the actual expenditure will look like in the future, particularly with how inflation may develop, so for now, the annual passive income goal is $40,000.

That target may need to rise to $50,000 or $60,000, but at the start of the goal, it was $40,000. I have a long way to go, but I've made good progress.

I regularly write about the ASX shares in my portfolio. I'm targeting businesses that pay dividends, and I'm trying to find ones that can grow their dividends organically over time (though that's not guaranteed).

Some of the ASX dividend shares I'm invested in include Washington H. Soul Pattinson and Co. Ltd (ASX: SOL), Brickworks Limited (ASX: BKW), Duxton Water Ltd (ASX: D2O), Bailador Technology Investments Ltd (ASX: BTI) and Altium Limited (ASX: ALU).

How I'm building towards the $40,000 goal

I don't know what future dividend yields will be, but I think a reasonable (grossed-up) yield to target is 4% when I'm looking at ASX dividend shares.

With a 4% yield and a goal of $40,000, that translates into a required portfolio value of $1 million.

Everyone's finances are different, so I'll run through a few different scenarios with a compound calculator showing how someone could build towards that total as if they were starting at $0.

Over the ultra-long term, the ASX share market has delivered an average return per annum of around 10%, so that's going to be the number I use – it could be worse or better than that.

Starting at $0, investing $500 a month turns into $1 million in around 29 years.

Investing $1,000 a month grows into $1 million in less than 23 years.

If we invested $2,000 per month then this would reach $1 million in less than 17 years.

Investing $3,000 a month would reach $1 million in less than 14 years.

Of course, we won't necessarily invest the exact same amount every month, but we can think of it as just an average over a year.

Foolish takeaway

I'm hopeful that I can reach the passive income target number in my 40s (I'm currently in my early 30s), but time will tell whether I'm successful or not.

There are plenty of compelling ASX dividend shares that could help with an investment income goal, not just the ones I mentioned were in my portfolio.

Motley Fool contributor Tristan Harrison has positions in Altium, Bailador Technology Investments, Brickworks, Duxton Water, and Washington H. Soul Pattinson and Company Limited. 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 Bailador Technology Investments, Brickworks, and Washington H. Soul Pattinson and Company Limited. 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

$100 Australian notes on top of each other.
Dividend Investing

These buy-rated ASX dividend stocks offer 7%+ yields

Analysts expect these buy-rated stocks to provide income investors with big yields.

Read more »

Happy man holding Australian dollar notes, representing dividends.
Dividend Investing

3 outstanding ASX dividend shares to buy next week

Analysts are tipping these shares to offer big returns over the next 12 months.

Read more »

A male oil and gas mechanic wearing a white hardhat walks along a steel platform above a series of gas pipes in a gas plant
Dividend Investing

Should I buy Santos shares for dividend income?

Santos shares have been steadily upping their dividends since 2020.

Read more »

A businessman lights up the fifth star in a lineup, indicating positive share price for a top performer
Dividend Investing

2 of the best ASX dividend shares to buy in December

Bell Potter rates these dividend shares very highly. Let's see why.

Read more »

Man holding Australian dollar notes, symbolising dividends.
Dividend Investing

Analysts expect 5% to 8% dividend yields from these ASX stocks

Here's why these dividend stocks could be great options for income investors today.

Read more »

Male hands holding Australian dollar banknotes, symbolising dividends.
Dividend Investing

5 ASX 200 shares with ex-dividend dates next week

Do you own any of these shares that are primed to pay out?

Read more »

A couple makes silly chip moustache faces and take a selfie on their phone.
Dividend Investing

Invested $5,000 in Telstra shares in 2021? Here's how much passive income you've already earned

Atop the share price gains, how much passive income have investors earned from their Telstra stock?

Read more »

Happy couple enjoying ice cream in retirement.
Dividend Investing

Buy Telstra and this ASX dividend stock now

Analysts are saying good things about these dividend stocks. Let's see why they are bullish.

Read more »