How to make $2,000 of monthly passive income from ASX shares

A $2,000 monthly passive income stream would be useful for many investors.

It could help cover groceries, utilities, insurance, travel, or part of a mortgage. It could also make retirement feel a lot more comfortable.

But how could an investor realistically build it? Let’s dig deeper into things.

Build the passive income machine

Aiming for $2,000 a month means aiming for $24,000 a year in passive income.

If an investor can build a portfolio with an average dividend yield of 5%, they would need approximately $480,000 invested to generate that level of income.

However, it is worth noting that ASX dividends do not usually arrive neatly every month. Many companies pay dividends twice a year, while some trusts and ETFs pay quarterly or monthly distributions. So this is best viewed as an average monthly income target, not a monthly payment schedule.

There are a number of ASX income options that could help investors achieve a dividend yield around this level.

This includes HomeCo Daily Needs REIT (ASX: HDN), which offers exposure to everyday-needs property assets and Universal Store Holdings Ltd (ASX: UNI), which offers a higher-yielding retail option.

In addition, APA Group (ASX: APA) is a high-yield option that provides exposure to energy infrastructure, and Harvey Norman Holdings Ltd (ASX: HVN) can offer attractive fully franked dividends when conditions support them.

Investors could also look at an income-focused ETF such as the Vanguard Australian Shares High Yield ETF (ASX: VHY), which provides exposure to a basket of higher-yielding ASX shares.

But it is important to note that a dividend yield should never be the only consideration. A 5% target is useful, but the income still needs to be sustainable. Dividends can be cut, distributions can change, and share prices can fall.

That is why a passive income portfolio should be built around quality, diversification, and financial strength, not just the highest yield on the screen.

What if you are starting from zero?

Of course, many investors will not have $480,000 ready to invest.

That changes the game. The first goal is not to generate the income immediately, it will be to build the capital base that can later produce the income.

This is where regular investing can do the heavy lifting.

If an investor starts from zero, invests $1,000 a month, and achieves an average annual return of 10%, they could build a portfolio worth approximately $480,000 in just over 16 years.

That return is not guaranteed, but it is in line with historical returns.

Which shares should you buy at this stage?

Dividend shares may not be the best way to deliver on our target return. High-yield shares can be useful once the income portfolio is built, but they may not deliver the strongest total returns during the accumulation phase.

Instead, investors may want to focus on quality ASX shares that can compound over time.

That could include Goodman Group (ASX: GMG), which has exposure to logistics, industrial property, and data centres, and Wesfarmers Ltd (ASX: WES), which has a strong portfolio of retail and industrial businesses.

In addition, tech stocks WiseTech Global Ltd (ASX: WTC) and Xero Ltd (ASX: XRO) could be great long-term options for Aussie investors.

The idea is to build the engine first. Once the portfolio reaches the required size, investors can gradually shift more attention toward income, dividends, and cash flow.

That may not happen overnight. But with patience, regular investing, and a focus on quality, a $2,000 monthly passive income stream from ASX shares can become a realistic long-term goal.

The post How to make $2,000 of monthly passive income from ASX shares appeared first on The Motley Fool Australia.

More reading

• Forget CBA and buy these ASX dividend shares
• 2 ASX shares with dividend yields above 8%
• Want to retire earlier? This mix of ASX shares and ETFs could help
• Which is better: A 4% dividend yield or a 5% term deposit?
• Down 46%: What should I do with my WiseTech shares now?

Motley Fool contributor James Mickleboro has positions in Goodman Group, Universal Store, WiseTech Global, and Xero. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Goodman Group, Wesfarmers, WiseTech Global, and Xero. The Motley Fool Australia has positions in and has recommended Apa Group, Harvey Norman, WiseTech Global, and Xero. The Motley Fool Australia has recommended Goodman Group, HomeCo Daily Needs REIT, Universal Store, Vanguard Australian Shares High Yield ETF, and Wesfarmers. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.