5 simple steps to earning $500 in monthly ASX passive income

Almost any investor can build a $500 monthly passive income from ASX dividend shares.

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Fancy earning an extra $500 a month in passive income from ASX dividend shares?

While that's likely not enough to kick up your heels and quit your day job, banking a bonus of $6,000 a year in dividends from high-yielding ASX shares would certainly come in handy, especially in retirement.

Even more so, as many top ASX stocks pay fully franked dividends. Meaning you should be able to hold onto more of that passive income when it's time to pay the ATO its annual dues.

With that in mind, we look at five surprisingly simple steps to building up that dividend income stream.

Save for and research those ASX passive income stocks

There's no way around it.

Before you can earn $500 a month in passive income from ASX dividend stocks, you'll need to save some money to buy them.

If you don't have any investable savings at hand, don't fret. You don't need to be sitting on thousands of dollars to get things rolling. You can start by setting aside as little as $20 a week into an interest-bearing account. That will give you more than $1,000 to put into the market by the end of the year.

Then, you'll want to decide which high-yielding ASX dividend stocks look right for you.

This second step, the research, is crucial. It's where you may wish to seek expert advice.

Keep in mind that not every high-yielding stock can be depended on to pay regular dividends.

Just look at former (and potentially future) passive income darling Yancoal Australia Ltd (ASX: YAL). The ASX coal stock had been trading at dividend yields well north of 10% before suspending its interim dividend this year amid more difficult market conditions and eroding profits.

If you're unsure which ASX stocks to invest in for passive income, consider a stock like the Betashares Australian Dividend Harvester Fund (ASX: HVST). HVST provides instant exposure to a diversified portfolio of high-yielding ASX dividend shares.

As at 30 September, HVST had returned 25.2% over the prior 12 months, net of management fees and inclusive of franking credits.

Invest in quality and watch that passive income role in

The third step to building that $500 in monthly passive income is to invest in quality companies.

What does that mean?

As legendary investor Warren Buffett famously advised, "Look for companies with great brands and the ability to control prices."

And of course, "A great manager is as important as a great business."

But don't just invest in one or two ASX stocks to build that income stream. Make sure that over time, you spread your investments over a broader range of companies (say 10), ideally operating in various sectors and locations. That kind of diversity will lower the risk of your income taking a sharp hit if any single sector or company comes under pressure.

Moving on to the fourth and simplest step of all, watch that passive income come in. If you don't need that right away, you can speed your path to a $6,000 annual income stream by reinvesting those dividends instead.

Which brings us to the fifth step…

Review your ASX dividend shares regularly

No matter how thorough your initial research is, it's important to review your ASX stock holdings on a regular basis.

That's a lot simpler than it sounds, and it certainly doesn't involve daily reviews.

Apart from occasionally checking if there are any price-sensitive updates, you'll want to follow along with the companies' quarterly updates to ensure nothing has changed with your initial investment thesis and that they remain on track to deliver reliable passive income payments.

Moving forward, depending on your current spare cash holdings and monthly savings, it may take some time to achieve that $500 monthly income goal. But that's okay. If you stick to your plan, you'll get there in good 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 no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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