I'm sure most readers would love to generate a second income without having to lift a finger.
Well, the good news is that if you have an ASX share portfolio, you could achieve this goal.
Let's have a look at three steps to take to turn this into a reality.
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Step one: Build a winning portfolio
For the purpose of this article, I'm going to assume that you are going to start with a $20,000 investment portfolio.
With these funds, the first step is to build an ASX share portfolio filled with high-quality companies that have strong business models and positive long-term growth outlooks.
Companies like Goodman Group (ASX: GMG) and ResMed Inc. (ASX: RMD) spring to mind as examples of quality options to build a portfolio around. Over the past decade, their shares have generated average total returns of 22.6% and 20.6% per annum, respectively.
There's no guarantee that they will beat the market again over the coming decade, but having companies in your portfolio of this quality certainly put you in a good position to achieve a return at least in line with the historical market average of 10% per annum.
Step two: Let compounding work its magic
The next step is to do almost nothing. Once you've built a strong portfolio, you can let compounding work its magic.
If you can generate a return of 10% per annum and reinvest any dividends, it would grow to a value of approximately $52,000 in 10 years.
But with compounding really starting to take hold, let's keep going for another five years to make the most of it.
All else equal, after a further five years, your ASX share portfolio would have grown to almost $85,000.
Step three: Generate a second income
Once you have grown your portfolio to this level, you can start to think about generating a second income.
This step will involve reshaping your portfolio to a focus on dividends. If you can build a portfolio with an average dividend yield of 6%, you would be generating $5,100 in dividend income each year (and growing) from an $85,000 ASX share portfolio.
At present, Accent Group Ltd (ASX: AX1) is an example of an ASX share that offers a forward dividend yield of that level according to Morgans. It is forecasting fully franked dividends per share of 14 cents in FY 2025 and then 15 cents in FY 2026. This will mean dividend yields of 6.1% and 6.7%, respectively, over the next two financial years.
Final thoughts
The key is to focus on buying the highest quality companies you can find and letting compounding work for you. Combined with a pinch of patience, you will position yourself to generate a second income from ASX shares in the future.
