Here’s how ASX investors can build a meaty second income starting from scratch

So you want to build a second income but don’t currently have any money invested in ASX shares? Well, you’ve come to the right place.

ASX shares provide one of the best and easiest paths to a source of secondary, passive income.

Dividends are passive income in the purest sense of the word. The paycheques that dividend shares send us every few months arrive regardless of whether we are working or retired, young or old, healthy or sick.

The only variable in this equation is the ASX dividend share itself  – whether the company is financially capable of funding its next dividend.

So today, let’s map out how a would-be ASX investor starting from scratch can build up a meaty second stream of income to supplement their day job.

How to build a second income with ASX shares from scratch

The first step in building up a stream of secondary dividend income from ASX shares is to get your financial house in order. There is little benefit in investing in shares if you already have significant debts.

A mortgage is fine, but if you have personal or car loans or outstanding credit card accounts, you’d almost certainly get a better bang for your buck by paying these off as soon as possible before you start deploying cash into the stock market.

Provided your debts are under control, the next step is to budget for investing. There’s no way around this one: building wealth and passive income in the stock market requires regular, meaningful investments of money.

So, before you get started, take a look at your income and expenses. You’ll need to be in a position where you habitually spend less than you’re earning and invest the difference.

If you do manage to get yourself into a position where you can reasonably rely on some surplus cash flow every pay cycle, you’re ready to invest for a second income.

The next task to tick off is picking the dividend shares to buy. The ASX is full of dividend payers, but new investors should start simple, in my view. Picking a mature, dividend-paying blue chip stock like one of the big four ASX banks, Telstra Group Ltd (ASX: TLS) or Woolworths Group Ltd (ASX: WOW), would be a fine start.

But I think an even better option is to go with an investment that takes care of portfolio management for you, at least until you gain some confidence in how the markets work.

Choosing the right dividend shares

A great choice would be a simple index fund like the BetaShares Australia 200 ETF (ASX: A200) or the Vanguard Australian Shares High Yield ETF (ASX: VHY).

Both of these exchange-traded funds (ETFs) invest in a basket of dozens of the largest stocks on the ASX. They are inherently diversified and require little effort after you buy them. And they’ll typically pay you a generous stream of secondary income to boot.

You could also go a different route and pick a listed investment company (LIC) like Argo Investments Ltd (ASX: ARG). A LIC like Argo specialises in providing investors with an underlying portfolio of blue chip stocks, which are conservatively managed for solid returns and hefty dividend income.

Make sure to accelerate this process by reinvesting your dividends at first as well. Secondary income is great. But using it to buy even more income-producing shares will get you to your passive income goals faster than taking the cash and blowing it on a night out.

Once you make your first investment, try and invest what you can, when you can, going forward. It will take some time. But if you follow a regular investing plan religiously, and put as much of your spare cash into your investments as possible, you’ll be able to build up a substantial stream of second income before you know it.

The post Here’s how ASX investors can build a meaty second income starting from scratch appeared first on The Motley Fool Australia.

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Motley Fool contributor Sebastian Bowen has positions in Telstra Group. 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 positions in and has recommended Telstra Group. The Motley Fool Australia has recommended Vanguard Australian Shares High Yield ETF. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.