How I’d target passive income by investing $75 a month in ASX dividend shares

If you’re anything like me, your back pocket will be feeling a little lighter after yesterday’s festivities. Fortunately, I have a way to lessen the load a little next year without breaking the bank. If my New Year’s resolution was to build a passive income, but I only had $75 a month to spare, here’s how I would work to achieve it with ASX dividend shares.

Key considerations

Consistency is key when it comes to building an income stream. Just like most of us receive an income by attending jobs most days, an investor building a passive income should turn up for their investments.

That might mean setting a monthly reminder to invest a set amount or creating an automatic transfer into an investing account.

Speaking of investing accounts, if I was only adding $75 a month to my portfolio, I would be extra cautious of associated fees so to make the most of my money. Thus, I would shop around to find the best brokerage for my needs.

Finding ASX dividend shares to invest in

With those simple tasks ticked off my to-do list, I would turn my attention to finding ASX dividend shares to invest in.

Buying dividend shares is generally the same as buying any other stock. I would still consider a company’s growth prospects, its competitive advantages and disadvantages, and its balance sheet to assess its strengths and weaknesses.

However, I would likely pay closer attention to an ASX dividend shares’ profits, and where those profits are coming from. The ideal dividend stock would have consistent notable cash flow and a good debt position, in my opinion, giving them a strong base from which to pay dividends.

I would also consider a company’s dividend history. A green flag might be one that has previously prioritised payments to shareholders during hard times. Though, whether that was a smart financial move might also need to be analysed.

Finally, I would look at an ASX share’s dividend yield. That measures the amount a company pays out compared to its share price.

How to manage risks with ASX dividend shares

One might think investing in a company with a massive dividend yield is the best use of $75 each month. However, I always prefer sustainable yields over high ones.

Such sustainability is probably particularly important if I were investing just $75 a month, as my risk tolerance would likely be modest.

Speaking of risks, I would also aim to build a diverse portfolio, thereby reducing some of the risks investing can bring.

Though, it’s important to note no investment is guaranteed to provide either returns, dividends, or even downside protection, no matter how considered it is.

Looking to the future

Investing $75 a month likely won’t build a million-dollar a year passive income by next Christmas.

Indeed, that monthly contribution would equal a $900 annual investment – which would be capable of paying out $45 a year on a 5% dividend yield.

But I believe $75 a month is still a good place to start. The market has historically always gone up. Therefore, building a portfolio over time is, in my opinion, far better than not building one at all.

The post How I’d target passive income by investing $75 a month in ASX dividend shares appeared first on The Motley Fool Australia.

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Motley Fool contributor Brooke Cooper 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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