How I’d invest $300 a month in ASX shares to target an extra income of $20,000 per year

Building a passive income from ASX shares is something that anyone can do.

And while it doesn’t happen overnight, if you’re both disciplined and patient, generating a $20,000 second income from ASX shares is very achievable, even by making modest investments, thanks to compounding.

Getting started

Firstly, in order to get a $20,000 a year paycheck from the share market, you’re going to have to build your portfolio to a size that yields this amount in dividends.

Given that many banks like Westpac Banking Corp (ASX: WBC) and high-yield ASX ETFs offer 6% yields for investors, we’ll base our calculations on that.

To be paid $20,000 of dividends each year when earning a 6% dividend yield, you’ll need a portfolio of ASX shares valued at approximately $330,000.

When you’re starting out, that might seem like an unattainable goal, but I don’t believe it is. Once again, it’s all about patience and discipline.

Over the long term, share markets have provided investors with an average annual return of 10%. Unfortunately, I cannot guarantee that this will be the case in the future, but I would be disappointed if future share market returns are not in line with historical levels.

If you’re able to invest $300 a month into high-quality ASX shares and generate a 10% average annual return, your portfolio will have grown to be worth $335,000 in 24 years.

At that point, you could switch your focus to income and build a diversified portfolio filled with ASX shares offering dividend yields averaging 6%. Doing so would give you a $20,000 second income without having to lift a finger.

Speedier options

Investors who are able to put a little bit extra into their monthly investments will get there even quicker.

For example, investing $500 would grow your portfolio to the required size after a little over 19 years.

Can stretch your budget further? Well, $750 would take a touch over 15 years to hit our goal.

Which ASX shares should you buy?

I would focus on buying ASX shares with strong business models, excellent management teams, competitive advantages, and positive growth outlooks.

Companies such as CSL Limited (ASX: CSL), Domino’s Pizza Enterprises Ltd (ASX: DMP), and Goodman Group (ASX: GMG) tick a lot of these boxes for me.

Alternatively, you could take the easy option and buy index-tracking ETFs like Betashares Nasdaq 100 ETF (ASX: NDQ) or Vanguard Australian Shares Index ETF (ASX: VAS). These funds aim to provide you with the return of the respective index before fees.

The post How I’d invest $300 a month in ASX shares to target an extra income of $20,000 per year appeared first on The Motley Fool Australia.

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More reading

• ASX shares: Is this my once-in-a-lifetime chance for mega returns?
• Here’s why analysts rate these blue chip ASX 200 shares as buys
• Why top brokers say surge in CSL share price will continue
• Should I buy Westpac shares for the big dividend?
• How to create a million-dollar ASX share portfolio in two decades

Motley Fool contributor James Mickleboro has positions in BetaShares Nasdaq 100 ETF, CSL, Domino’s Pizza Enterprises, and Westpac Banking. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended BetaShares Nasdaq 100 ETF, CSL, and Domino’s Pizza Enterprises. The Motley Fool Australia has positions in and has recommended BetaShares Nasdaq 100 ETF. The Motley Fool Australia has recommended Domino’s Pizza Enterprises, Goodman Group, and Westpac Banking. 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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