How I’d aim to build $10,000 a year in passive income from ASX shares

A $10,000 annual passive income stream would be hard to turn down.

It could help cover insurance, council rates, electricity, groceries, or part of a mortgage.

The question is how to get there without chasing the highest-yielding ASX shares on the market and taking on more risk than necessary.

First step

The first step is to turn the goal into a portfolio number.

If an investor wants $10,000 a year in passive income and can earn an average dividend yield of 5%, they would need an ASX share portfolio worth around $200,000.

Alternatively, at a 4% yield, the required portfolio rises to $250,000, and at a 6% yield, it falls to about $167,000.

This does not mean investors should automatically chase the 6% option. A lower but more sustainable yield can be more valuable (and safer) than a higher yield that gets cut later.

Build the passive income engine

Most investors will not have $200,000 sitting ready to invest.

As a result, most investors will have to build the income engine piece by piece.

This is where diversification is key. An investor should look to buy ASX shares across different parts of the market. That might include infrastructure, supermarkets, healthcare, property, insurance, and selected industrials. Examples include Woolworths Group Ltd (ASX: WOW), Telstra Group Ltd (ASX: TLS), and APA Group (ASX: APA).

The aim is to avoid relying on one company or one sector for all the income.

A portfolio dominated by banks and miners may produce large dividends in some years, but those payouts can move with credit cycles, commodity prices, and economic conditions.

A broader mix can make the income stream feel more dependable.

Let the first dividends do more work

In the early years, the most important dividends are the ones an investor does not spend.

Reinvesting them can speed up the process because the portfolio starts buying more ASX shares, which should then produce more dividends of their own.

This is where passive income becomes a flywheel.

The early progress may look slow. But as the portfolio grows, each dividend payment can buy more income-producing assets. Over time, the compounding effect can become much more visible.

Foolish takeaway

Aiming for $10,000 a year in passive income from ASX shares is not about finding one magic stock. It is about creating a growing collection of assets that can send cash back to investors year after year.

There will be setbacks. Dividends can be reduced. Share prices can fall. Interest rates can change the way investors value income stocks.

But that does not make the goal unrealistic. It just means the portfolio needs to be built with patience and diversification.

The post How I’d aim to build $10,000 a year in passive income from ASX shares appeared first on The Motley Fool Australia.

More reading

• Why Telstra shares are a retiree’s dream for FY27
• 5 ASX dividend stocks for passive income investors
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• Why Telstra and these defensive ASX dividend shares could be top buys

Motley Fool contributor James Mickleboro has positions in Woolworths 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 Apa Group and Telstra Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.