ASX dividend shares could be the ticket for workers who want to replace their whole salary with passive income.

Businesses have great potential to be able to pay dividends and re-invest in their businesses, enabling income for investors as well as compounding profit.

Investors have more options for where to put their money these days. Some term deposits and savings accounts can offer investors a yield that starts with a 4%.

But, I don’t think those investments that offer a fixed return are the way to build wealth because they don’t produce any growth themselves.

That’s why I think ASX dividend shares can be the tool that we use to build wealth.

How I’d plan to replace a salary with passive income

Before we get to the investing side of things, I think investors need to figure out how much they’re able to save and what level of passive income they’re aiming for.

Costs are quite a lot higher for households these days, with more expensive food and energy. It’s okay if investors aren’t able to save much in the current environment. Keeping a roof over one’s head and putting food on the table is the most important thing.

I’d also suggest that each adult needs to ensure they’re not trying to save too much and hurting today’s enjoyment. What I mean by that is that people get older, circumstances change and so on – sometimes it’s better to pay for an experience this year than wait for a distant future.

Having said that, I’d figure out how much we can save and invest. It could be $500 a month, $1,000 a month, $2,000 a month or even more.

Next, I’d want to work out what the dividend passive income goal is. Every household’s expenditure is different. The desired expenditure could also be different.

The Association of Superannuation Funds of Australia’s Retirement Standard suggests that a couple that owns their own home will need an income of about $67,000, while a single person will need an annual passive income of more than $47,000.

Start saving and investing

I’d then get to work and start investing that $1,000 a month or $2,000 a month, perhaps more, into ASX shares. So, that would turn into $12,000 a year or $24,000 a year.

Of course, making an annual passive dividend income of $67,000 or more will take time to build.

Investing $1,000 a month, and if the portfolio grows at 10% a year, could achieve $1.18 million after 25 years.

Investing $2,000 a month, and if the portfolio grew by 10% per year, could rise to $1.37 million after 20 years.

Both of those totals may seem like a lot, but I think they’re very achievable thanks to compounding. In the first example, investing $1,000 a month, it only takes the investor to add $300,000 of their own money – while $880,000 comes from investment returns in that example.

Which ASX shares to buy?

There are some ASX shares that I think can provide a solid amount of growth for investors and help compound a portfolio’s value, such as Washington H. Soul Pattinson and Co. Ltd (ASX: SOL), VanEck Morningstar Wide Moat ETF (ASX: MOAT), Wesfarmers Ltd (ASX: WES), VanEck MSCI International Quality ETF (ASX: QUAL), Lovisa Holdings Ltd (ASX: LOV) and Betashares Nasdaq 100 ETF (ASX: NDQ).

When investors get closer to the age or figures they’re aiming for, I’d also want to consider some ASX dividend shares that pay good yields like Soul Pattinson, Wesfarmers, Rural Funds Group (ASX: RFF), Premier Investments Limited (ASX: PMV), Charter Hall Long WALE REIT (ASX: CLW) and Metcash Limited (ASX: MTS).

A $1.2 million portfolio with a 5% dividend yield would produce an annual passive income of $60,000. That sounds great to me.

The post How I’d aim to replace an entire salary with passive income from ASX dividend shares appeared first on The Motley Fool Australia.

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Motley Fool contributor Tristan Harrison has positions in Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia has positions in and has recommended Washington H. Soul Pattinson and Company Limited. 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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