How to generate $50,000 of passive income from ASX shares each year

Wouldn’t it be great if you could generate $50,000 of passive income from ASX shares?

This might be enough for you to quit your day job and let your investments do the work for you.

And while $50,000 in passive income each year might seem like a pipe dream, history shows that is achievable.

Though, it doesn’t happen overnight. It will take a long-term approach and a disciplined investment strategy.

How to make $50,000 in passive income with ASX shares

The first step is to make regular investments into high-quality ASX shares.

If you can invest $1,000 a month you could gradually build a substantial portfolio over time.

You may want to consider allocating your investment across a range of reliable dividend paying ASX shares, focusing on established companies with a track record of sustainable payouts.

But it’s important to note that we don’t want to withdraw our dividends in the near term.

That’s because by reinvesting your dividends back into the market, you can take advantage of compounding returns and grow your portfolio at a faster rate.

Many ASX shares offer dividend reinvestment plans (DRPs). These allow shareholders to automatically reinvest their dividends in additional shares, often at a discounted price. Exploring these options can be a big boost to your investment strategy.

Compounding returns

Historically, the share market has generated a return of approximately 10% per annum.

There’s no guarantee that this will happen in the future, but we’re going to base our calculations on this figure.

If you were to achieve a 10% annual return and invest $1,000 a month, in 10 years you would have grown your portfolio to approximately $200,000.

While this is a sizeable figure, it’s still a little soon to start typing up your resignation letter.

Based on a 5% dividend yield, a $200,000 portfolio would provide investors with passive income of $10,000. We need to keep going.

The good news is thanks to compounding, your portfolio will really start to explode in value from here.

For example, if we fast-forward another 10 years, all else equal, your portfolio will have ballooned to approximately $725,000.

We’re getting closer. A 5% yield on this portfolio would generate passive income of $36,250.

But don’t worry, it will take just three more years of $1,000 per month investments and 10% returns to get us to our end goal.

At that point, your portfolio would be worth $1 million and an average 5% dividend yield across it would produce $50,000 of passive income.

Overall, this demonstrates what is possible with ASX shares. It just takes a combination of patience, diversification, investing in quality, and consistent reinvestment of dividends.

The post How to generate $50,000 of passive income from ASX shares each year appeared first on The Motley Fool Australia.

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Motley Fool contributor James Mickleboro 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 no position in any of the stocks mentioned. 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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