I think that ASX dividend shares could be an excellent way for people to grow their passive income. Investing just $200 a month could eventually turn into $20,000 of annual income.
Now, donât get me wrong. Investing $2,400 in the first 12 months isnât suddenly going to unlock $20,000 of annual dividends. It will take some time, but I believe that itâs possible.
Compounding is a very powerful financial force, which can enable smaller amounts to grow into much larger amounts. Albert Einstein once supposedly said:
Compound interest is the eighth wonder of the world. He who understands it, earns itâ¦he who doesn’tâ¦pays it.
For example, using a compound interest calculator, investing $200 a month for 40 years, returning an average of 10% per annum, turns into $1.06 million. That only requires $96,000 of money from the investor â the rest (in this example) comes from compounding returns.
But, I donât think someone needs $1 million to make $20,000 of annual income. A portfolio with a yield of 4% would only need to be half the size ($500,000) to make $20,000, while a 6% yield would only need to be $333,334 in size to make $20,000.
How Iâd invest in ASX shares
There are a few principles that Iâd take into this investing plan.
First, Iâd take a brave attitude when it comes to market crashes. Volatility regularly happens. If Iâm invested in good businesses, a temporary dip (even a big one) wonât bother me. In fact, I would see lower prices as an opportunity to buy, rather than panic and sell. Itâs during those times that the best prices can be found.
Second, I would want to consistently invest, through the ups and downs into the best opportunities I could see with a dollar cost averaging (DCA) strategy. While share prices are always changing, I think thereâll always be at least one idea that could be a good opportunity.
Third, Iâd only invest in businesses that seem as though they have a good potential to grow earnings and dividends. I think itâs the businesses that are growing their underlying value that have the best chance of achieving share price growth and good dividends over time.
For example, several years ago I invested in Altium Limited (ASX: ALU) shares when the dividend yield was more than 3%. Since then, the dividend (and profit) has grown enormously and my yield-on-coast is much higher. In 2014 it paid an annual dividend of 12 cents per share and in FY22 it paid an annual dividend of 47 cents per share.
Some of the names I believe can provide a good combination of dividends and growth in the coming years include Adairs Ltd (ASX: ADH), Premier Investments Limited (ASX: PMV), Beacon Lighting Group Ltd (ASX: BLX), Lovisa Holdings Ltd (ASX: LOV), Healthia Ltd (ASX: HLA), Bailador Technology Investments Ltd (ASX: BTI) and Propel Funeral Partners Ltd (ASX: PFP).
The post How Iâd invest $200 a month in ASX shares to make a $20,000 passive income for life appeared first on The Motley Fool Australia.
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Motley Fool contributor Tristan Harrison has positions in Altium and Bailador Technology Investments. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Adairs, Altium, Bailador Technology Investments, Healthia, and Lovisa. The Motley Fool Australia has positions in and has recommended Adairs. The Motley Fool Australia has recommended Bailador Technology Investments, Healthia, Lovisa, Premier Investments, and Propel Funeral Partners. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.