My $10-a-day approach to building a second income with ASX shares

Considering starting a side hustle or putting in overtime for extra cash? You’re not alone. However, I’d prefer my second income to be passive – and ASX dividend shares can help me build it.

Here’s how I’d approach investing on the ASX with $10 a day and a goal to create a long-term income stream.

Turning $10 a day into a second income

Putting aside $10 a day is a powerful wealth-building habit. Over the course of a year, a daily $10 saving grows to become a $3,650 next egg.

That’s more than enough to kick-start my plan to create a second income.

Identifying ASX dividend shares to buy

Step two is likely to be the most daunting for new investors – buying ASX dividend shares. But it needn’t be difficult or confusing.

Shares are basically a piece of a company, and dividends are essentially spare cash that that company hands out to its investors.

So, if I were searching for dividend shares, I would be looking for a company that has the potential to earn consistent profits now and into the future.

And that means I’d be looking for a company (or companies) that offer in-demand products or services and boast competitive advantages over their peers.  

For instance, people have to eat. As a result, demand for supermarkets will always exist. So, Woolworths Group Ltd (ASX: WOW) probably won’t struggle for revenue any time soon.

Another example: those working in the healthcare industry will always need protective gloves. As a result, glove manufacturer and supplier Ansell Limited (ASX: ANN) will likely always realise an income.

I’d also take a good look at a company’s balance sheet. If it has substantial debts, I’d likely assume a fair chunk of its revenue will go towards servicing loans instead of into the pockets of shareholders.

Valuing dividend champions

But finding a business capable of long-term profits isn’t enough. I’d also want to buy it at a decent price.

Buying shares in a good company for more than they’re worth can make for a bad investment.

Not to mention the cheaper one buys a quality company, the better the dividend yield can be expected to be. A company’s dividend yield compares its share price against the amount it pays out annually.

There are plenty of ways to determine if a company is trading at an attractive price. Some simple methods include working out its price-to-earnings (P/E) ratio or price-to-book (P/B) ratio. All the information one needs to calculate these ratios can be found in a company’s financial reports.

Growing my second income

If I were to invest $3,650 in ASX shares capable of providing a healthy 5% dividend yield, I could realise $182.50 of passive income in my first year.

That’s probably nothing to write home about. However, by consistently setting aside $10 a day to invest, I would expect the passive income offered by my portfolio to grow alongside its value.

And if I didn’t need the extra cash, I’d use it to buy more shares. That way I could compound any gains I realise.

Though, it’s important to remember that there will most likely be some bumps in my wealth-building road. The market is prone to downturns, corrections, and even crashes, but it has always historically gone up.

Still, no investment is guaranteed to provide returns.

The post My $10-a-day approach to building a second income with ASX shares appeared first on The Motley Fool Australia.

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More reading

• The boosted Woolworths dividend is hitting bank accounts today. Here’s what you need to know
• Brokers say these ASX 200 blue chip shares are buys
• I’m looking for once-in-a-decade opportunities in the stock market recovery
• Is Woolworths ‘the granddaddy of recession-proof stocks’?
• Top defensive ASX shares to buy in April 2023

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 recommended Ansell. 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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