How does $3,000 of monthly passive income sound? If you’re anything like me, you’d answer ‘appealing’. That’s why I’ve come up with a plan to build such an income stream by investing in S&P/ASX 200 Index (ASX: XJO) dividend shares.

Aussie stocks offer notably attractive dividend yields. I reckon that by buying a handful of the bourse’s average performers – or an exchange-traded fund (ETF) offering diverse exposure – I could realise such an income stream in just a few decades. And it wouldn’t take a huge nest egg to get started.

Creating – strategy

The first step I’d take on my passive income journey is perhaps the least exciting – budgeting. By creating a budget, I can easily identify what I spend on, where I could cut down on my spending, and how much spare cash I could use to better my financial position every month.

From there, I’d use my spare cash to pay down any high-interest loans and build a small financial safety net. Then, and only then, would I consider buying ASX 200 shares for passive income.

Building a portfolio of ASX 200 dividend shares

Let’s say I found I could easily invest $750 every month.

I reckon that by doing so consistently, starting at age 40, I could boast $3,000 of monthly passive income by the time I reach the Australian retirement age.

What would be my secret weapon? Compounding.

As of the end of April, the average ASX 200 share could pay out 4.61% of its value in the form of dividends each year, according to S&P Global data. That figure is known as a dividend yield.

If I could invest $750 a month, realise a consistent 4.61% yield, and reinvest all the dividends I receive in that time, I think my portfolio could compound to be worth close to $410,000 in 25 years time, before considering any potential share price gains. Take a look:

Years	Amount invested	Portfolio value
1	$9,000	$9,785
5	$45,000	$50,284
10	$90,000	$112,339
15	$135,000	$190,077
20	$180,000	$287,465
25	$225,000	$409,468

Of course, that hinges on receiving a 4.61% dividend yield – a factor I can’t guarantee. Further, my sums fail to consider costs like brokerage fees or any potential tax implications.

However, I don’t believe such costs would eat into my returns at such a rate to make my strategy undeserving.

Realising $3,000 of monthly passive income

So, I’ve built a near-$410,000 portfolio of ASX 200 shares – how do I realise $3,000 of monthly passive income?

Well, there are two strategies I might consider. The first is simply living off dividend income.

A $410,000 portfolio with a 4.61% yield could bring in $18,900 of dividends each year – or $1,575 a month. If I reshuffled my investments into higher-yielding stocks, however, I might earn more passive income.

For instance, $410,000 invested equally across ASX 200 shares Whitehaven Coal Ltd (ASX: WHC) and Harvey Normal Holdings Ltd (ASX: HVN) could bring in $38,100 of annual dividends right now, or $3,174 of monthly passive income.

The stocks boast respective dividend yields of 10.25% and 8.33% at the time of writing.

Another passive income strategy I could consider is the 4% rule. It assumes a portfolio will grow at around 4% each year.

Thus, an investor could theoretically withdraw 4% of their portfolio each year – equating to $16,400 a year, or $1,370 a month, for a $410,000 portfolio.

Though, past performance isn’t an indication of future performance, and no investment is guaranteed to provide returns or protection against downturns.

The post No savings at 40? Here’s how I’d aim to build a passive income of $3,000 a month 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 positions in and has recommended Harvey Norman. The Motley Fool Australia has positions in and has recommended Harvey Norman. 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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