Wouldn't it be nice to generate a lasting source of income without having to ever break a sweat?
Well, the good news is that it is possible and the Australian share market is a great place to generate passive income.
This is because there are plenty of ASX shares that distribute a portion of their profits each year in the form of dividends.
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Passive income from the share market
In light of the above, if I had $20,000 stashed away in a Commonwealth Bank of Australia (ASX: CBA) bank account or under my bed, I would consider putting it to work in the share market.
However, while it would be tempting to start reaping the rewards of my investment immediately, I think the smarter move is to let my investment compound.
After all, if I can grow my $20,000 into something larger, the potential passive income I generate will also be larger.
Nothing is guaranteed in the share market, but it is widely accepted that a 10% per annum return is possible. This is in line with the historical return of the share market.
With a 10% per annum return, my $20,000 would grow to become worth approximately $135,000 in 20 years. At that point, it could now be worth considering turning it into a source of passive income.
If I were able to build a portfolio of ASX dividend stocks with an average dividend yield of 6%, my $135,000 would pull in dividends of $8,100 a year. That's the equivalent of $675 a month if distributed evenly across the months.
Should I keep going for longer? Let's see what would happen if I did.
30-year timeframe
If I were to let my $20,000 compound at 10% per annum for 30 years instead of 20 years, it would grow to a sizeable $350,000.
The passive income on this amount would be significantly more. As before, with an average 6% dividend yield, I would be looking at dividends of $21,000 per annum.
This equates to monthly passive income of $1,750, which is more than double what I would have received if I stopped the process 10 years earlier.
It is also worth noting that my investment portfolio would continue to compound, albeit at a slower rate, after withdrawing dividends each year. This means that my income stream continues to grow year after year without having to lift a finger.
Overall, I believe this demonstrates just how wealthy you can become when you put your spare capital to work in the share market.
