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Could you really generate $50,000 of passive income from shares?
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James Mickleboro
James Mickleboro has been a Motley Fool contributor since late 2015. After studying economics at university back home in the United Kingdom, James came to live in Australia and managed to land a job at an Australian fund manager. This was the start of a love affair with Australian equities and he hasn't looked back since. James is part of the CFA Institute's Chartered Financial Analyst program and hopes it teaches him how to become an astute investor which allows him to help others with their own investing. Outside of reading and researching he spends many a late night watching the English Premier League and Seinfeld reruns.
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If you have a goal of generating a $50,000 passive income with ASX shares, then you will be pleased to know that history shows that it is achievable. It just requires a long-term approach and a disciplined investment strategy. By committing $12,000 annually, you can gradually build a substantial portfolio over time.
To embark on this journey, it is crucial to prioritise building a diversified portfolio of quality ASX shares. By spreading your investments across different companies and sectors, you can reduce risk and increase the potential for consistent returns. You may want to consider allocating your annual investment of $12,000 across a range of reliable dividend paying ASX shares, focusing on established companies with a track record of sustainable payouts.
Why dividend payers?
Dividend reinvestment can be a powerful tool for investors to use to accelerate wealth accumulation. 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) that 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.
It is worth noting that as time progresses and your portfolio grows, it is important to regularly review your holdings and rebalance if necessary. This ensures that you don't end up too concentrated in one sector that has been particularly hot. It also means you don't get stuck holding onto duds that hold back your portfolio.
Passive income generation
While generating a $50,000 passive income from ASX shares is certainly an ambitious goal, by maintaining a disciplined investment approach, it can become a reality over time.
Although past performance is no guarantee of future results, we are going to base our projections on historical data. Over the last 30 years, according to Fidelity, the Australian share market has delivered an impressive total return of 9.6% per annum.
If you were to invest $12,000 each year into ASX shares and earned an average return of 9.6% per annum, thanks to the power of compounding, after a touch over 25 years you would have grown your portfolio to $1.25 million.
At that point, if your portfolio is averaging a dividend yield of 4%, which is in line with the traditional market average, you would also be generating $50,000 of passive income. This time, instead of reinvesting it back into the share market, you could start to live your best life from this income.
It is also worth highlighting that this doesn't mean the end of your investment journey. If the returns continue at the same level, your portfolio would still be growing at 5.6% per annum after taking out your dividends.
Starting from $1.2 million and adding no further capital each year, your portfolio would reach almost $1.6 million in five years if it grew 5.6% per annum. Go another five years, and you're looking at a portfolio valued at almost $2.1 million. All thanks to compounding!
Ultimately, this could all be achievable with a combination of patience, diversification, investing in quality, and consistent reinvestment of dividends.
