Investing in ASX shares to grow and build a passive income is a great way to reduce the hours you need to work. By initially growing an ASX share portfolio and then converting it to generate income means you could be working part-time sooner than you thought.

The basic idea

In November 2019, the Australian Bureau of Statistics found that an employee’s average weekly total earnings was $1,256.20. Rounding this slightly we will work with an average annual income of $65,000. Meaning, to work part-time we would need to offset around half of this, or $32,500.

The basic idea is to initially invest consistently in growth-orientated shares. Building a large enough portfolio which can then be focused on dividend shares to generate a passive income of $32,500.

When chasing an income from ASX shares, I believe it pays to be prudent. This means not just choosing the shares with the highest yields, but instead looking into the future to see how sustainable those yields are. For this reason, despite a  number of shares offering dividend yields of up to 10%, I believe a more reliable and achievable yield would be around 5% to 7% when we consider franking credits. So let’s take the middle ground and base our calculations on a 6% dividend yield for the portfolio.

This means, in order to generate $32,500 from a yield of 6%, we would need to grow a starting portfolio of $541,667.

Growing your portfolio

This is where the journey begins.

Growing a portfolio to $541,667 may initially sound a little like a fantasy. However, you may be surprised how quickly this could be achieved through consistent investing. 

In fact, if you were to invest just $1,000 a month and earn a market average return of roughly 10% per year, it would take just over 17 years to amass $541,667.

However, if you do your research well (and dare I say with a little luck) and manage to invest in growth companies which outperform the market, you could be working part-time much, much sooner. For example, if you had made investments into companies such as Altium Limited (ASX: ALU), A2 Milk Company Ltd (ASX: A2M) or even Macquarie Group Ltd (ASX: MQG) you would have significantly reduced the growing time.

Earning income from your portfolio

Once your portfolio has reached its capital goal ($541,667 in our average example) it will be time to slowly alter its holdings to dividend-focused shares. You may even have found that some of your growth shares are now paying meaningful dividends and can remain in the portfolio. However, to achieve your average 6% dividend return you will likely need to sell some of your growth shares and invest that capital into reliable dividend payers.

A few great ASX shares I would suggest to look at today when building an income-focused portfolio are Washington H. Soul Pattinson and Co. Ltd (ASX: SOL), Rural Funds Group (ASX: RFF), Dicker Data Ltd (ASX: DDR), and Vanguard Australian Shares High Yield ETF (ASX: VHY).

Foolish takeaway

Finding the right combination of shares to achieve your desired income may be a little tricky at first. Additionally, the income from your portfolio will be ‘lumpy’ as most companies pay dividends twice a year. However, over time and by choosing the right dividend shares, your income will also hopefully grow.

It may sound like a lot to take in. But, remember, this is the big picture. A great way to start will be by breaking it down into your monthly investments.

More reading

• Here’s how I would put $10,000 to work on the ASX
• Why I would buy these quality ASX dividend shares today
• The latest ASX small caps broker picks to buy today
• Fund managers have been buying these ASX shares
• Is the Altium share price a buy at $36?

Motley Fool contributor Michael Tonon owns shares of Macquarie Group Limited, RURALFUNDS STAPLED, and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia owns shares of and has recommended Dicker Data Limited, Macquarie Group Limited, RURALFUNDS STAPLED, and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia owns shares of A2 Milk and Altium. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. 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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There are some ASX shares that I’d invest $1,000 into every single month.

I’m making the distinction because with some shares you wouldn’t want to commit to buying them every month. Sometimes individual ASX shares trade at good value and sometimes they aren’t.

But there are some ASX shares that it could make sense that you could invest $1,000 into every month, particularly in these coronavirus times. Here are three of those monthly ideas:

iShares S&P 500 ETF (ASX: IVV)

One of the best potential investments that people can make is a S&P 500 fund. You can buy this ETF on the ASX but it gives you exposure to many of the best businesses in the world.

I’m sure you know many of its top holdings. Shares like Microsoft, Alphabet, Apple, Amazon, Facebook, Berkshire Hathaway and so on. There are plenty of other useful shares within the holdings like Walmart, Costco and Netflix.

Not only does this ETF give you exposure to much better global businesses compared to ASX shares. But you also get it for a very cheap management fee. Blackrock’s annual cost for this ETF is 0.04%. You could easily invest $1,000 a month into this.

Future Generation Global Invstmnt Co Ltd (ASX: FGG)

This is a listed investment company (LIC) which invests in global shares, but it also has a philanthropic aspect too. It donates 1% of its net assets each year to youth mental health charities.

It invests in globally-focused fund managers based in Australian which are judged to be among the best in the country.

The fact you get to be invested in so many portfolios is attractive. Each fund would have its own group of non ASX shares, so you might be invested in many dozens of different shares. I think that’s great diversification. At the moment it’s trading at a big discount to the underlying net tangible assets (NTA) per share. I think it offers a lot of positives, which is why I’d be happy to invest $1,000 a month into this.

Magellan High Conviction Trust (ASX: MHH)

You may not want an investment into a large group of shares. Perhaps you only want to be invested in a high-conviction portfolio of around 10 of the best shares in the world which you can’t find with ASX shares.

At the moment it’s invested in shares like Alibaba, Alphabet, Microsoft, Facebook and Visa. These are all great businesses which have good balance sheets, attractive growth prospects and digital business models which are good in times like this. I think it’s a great idea to invest $1,000 a month into something like this.

As a bonus it targets a 3% distribution yield.

Which ASX share to buy?

I think all three of these ideas are likely to achieve outperformance compared to most ASX shares and the ASX index as a whole. At the moment I’d probably go for Future Generation Global because it’s trading at such a large NTA discount.

More reading

• Save your future self from financial misery
• Don’t delay: Start investing today in shares to become rich
• The importance of diversifying your ASX portfolio and how you can do it
• The smartest shares to buy if you have $2,000
• How I’d invest $50,000 into ETFs

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. 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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