Imagine waking up every morning knowing that your ASX share investments are quietly working for you — generating income whether you're sipping coffee, heading to work, or even taking a holiday.
That's the power of passive income, and it is more achievable than many people think.
If your goal is to earn $10,000 a year in passive income from ASX shares, here's a simple guide to get you started.
How much do you need?
The first question most people ask is: how big does my portfolio need to be?
It all depends on the average dividend yield of your investments. The dividend yield is simply the income you receive as a percentage of the amount you invest.
For example, if you achieve an average dividend yield of 5% across your portfolio, you will need around $200,000 invested to generate $10,000 a year. Whereas if your average yield is closer to 4%, you would need about $250,000.
The good news is you don't need to have that full amount on day one. Building a portfolio is a journey — and every dollar you invest today gets you one step closer.
Where to start
If you're starting from scratch, it is smart to focus on high-quality ASX growth shares instead of dividend shares to begin with.
Growth shares have a tendency of generating larger returns than dividend shares. And if you're starting from zero, you will want to build your portfolio up to target as quickly as possible so that you can start enjoying your passive income stream.
The best way to do this is with regular, consistent investing.
For example, investing $500 per month and aiming for an average 10% total annual return (in line with historical averages) could grow your portfolio to around $100,000 after 10 years.
And if you keep going for a further five years, you would be at the $200,000 mark — putting you in a position to start generating passive income.
The most important thing is to start early, stay consistent, and stay patient. Let time and compounding do the heavy lifting.
Focusing on passive income
Once you have a portfolio valued at $200,000, you can change your focus from growth shares to ASX dividend shares.
As mentioned above, if you can construct a portfolio that averages a 5% dividend yield, then you will be pulling in $10,000 of passive income each year.
An easy way to achieve this is through the Vanguard Australian Shares High Yield ETF (ASX: VHY).
It currently holds 67 ASX dividend shares that are forecast to have higher than average dividend yields such as BHP Group Ltd (ASX: BHP), Commonwealth Bank of Australia (ASX: CBA) and Telstra Group Ltd (ASX: TLS).
At present, it trades with a dividend yield of 5.1%. This would generate $10,200 of passive income from a $200,000 investment.
Foolish takeaway
The idea of earning $10,000 a year in passive income from ASX shares is no fantasy. It is a real, achievable goal — and the sooner you start, the easier it gets.
Your future self will thank you — every single quarter those dividend payments land in your account.
The post Want $10,000 a year in passive income? Here's how to get started with ASX shares appeared first on The Motley Fool Australia.
Motley Fool contributor James Mickleboro 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 positions in and has recommended Telstra Group. The Motley Fool Australia has recommended BHP Group and Vanguard Australian Shares High Yield ETF. 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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