How passive income generates free money for life (with a secret sauce!)

Receiving passive income from my ASX dividend shares gives me a very satisfying feeling.

We don’t need to do any work ourselves to keep receiving the stream of dividends year after year. That’s down to the business to keep generating profits and the leadership’s decision to keep rewarding shareholders.

The great thing about passive income from ASX shares

Interest rates have shot higher this year. This means that investors can get a higher return than before from term deposits and savings accounts. I think that’s a good thing. Savers deserve a good return from money in the bank.

But, if a savings account earns $100 in interest, some (or all) of that money needs to stay in the bank account for it to earn higher interest next time (assuming the RBA hasn’t just increased the official cash rate).

But, ASX dividend shares have the ability to pay out some of its profit as a dividend and re-invest the retained amount to grow the dividend for next time. People can decide to spend that dividend if they want to, and hopefully still get a larger dividend next time.

I rely on ASX shares for dividend income

My investment strategy is to pick businesses that I think can grow their profit and dividends over the long term. I’ve written a number of articles about the shares I own and why.

In my opinion, it’s great to own businesses that pay me a larger passive income amount most years (or every year). It is easier to focus on the long-term if growing dividends keep flowing into my bank account, compared to seeing the market’s gyrations and volatility.

A bonus with many ASX dividend shares is that they attach franking credits to dividend payments. Franking credits are refundable tax offsets, improving the tax position for Australian tax residents.

Dividends are not guaranteed payments, but businesses that are growing their payouts are steadily increasing the cash return for investors.

One of the longest-running consecutive annual dividend increase records belongs to APA Group (ASX: APA) shares.

The bonus ‘secret sauce’ of dividend investing

For me, one of the great things about quality ASX dividend shares is that if they are growing the profit, they can fund bigger payments.

But, a secret sauce is that as profits rise over the years, investors are likely to value that profit generation at a higher level. In other words, higher profits can lead to capital growth with an improvement in the share price.

So, good ASX dividend shares can offer a solid starting dividend yield, dividend growth and potential capital growth as well.

I think passive investment income can be a great way to fund my future life, which is why I’m building up my portfolio.

The post How passive income generates free money for life (with a secret sauce!) appeared first on The Motley Fool Australia.

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Motley Fool contributor Tristan Harrison 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 Apa Group. 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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