You might think you need a large savings pile to earn lifelong passive income from ASX shares.
But the truth is you can get started by investing much smaller amounts.
While most of our budgets are being stretched under the current economic conditions, I reckon I could set aside at least $5 a week to invest in ASX shares to reach my passive income goal.
Over time I might increase that amount. But the important thing is to begin diligently putting aside some money each week and cementing that savings habit.
At just $5 a week, I’d have $520 to invest at the end of two years. Or more, if I’ve been earning some interest on my cash savings.
The next question is, which ASX shares to target for that reliable passive income?
Where to for passive income from ASX shares?
The ASX offers a wide range of dividend shares for investors to choose from.
If I were diving straight in and hunting for individual companies to help deliver my passive income goals, I’d look for stocks that are paying fully or mostly franked dividends. This should allow me to hold onto more of that income when it comes time to pay the ATO its dues.
I’d also focus primarily on S&P/ASX 200 Index (ASX: XJO) dividend shares. That’s because these tend to be less volatile than small-caps and often have long track records of regular dividend payouts. There’s also more readily available research out there for the larger end of the market.
But even with that available research, it can be difficult for retail investors to sort the wheat from the chaff.
Instant diversification
This is why I might start my passive income portfolio with an investment in the Vanguard Australian Shares High Yield ETF (ASX: VHY).
The dividend-focused exchange-traded fund (ETF) offers me instant diversification with a single stock purchase. The ETF currently holds 76 dividend-paying ASX shares, and it has just under $3 billion in assets under management.
Its top four ASX shareholdings are BHP Group Ltd (ASX: BHP), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB), and Woodside Energy Group Ltd (ASX: WDS).
And fees won’t eat too deeply into your passive income stream. VHY charges an annual management fee of 0.25% per annum.
Over the past 12 months, the ETF has paid out $3.41 in dividends (distributions). At the current share price (unit price) of $68.31, that works out to a trailing yield of 5%, 91% franked.
Atop that passive income, VHY’s share price is also up 5.8% over the 12 months.
That brings its full-year returns to 11%, with some potential tax benefits.
But I won’t pull any of that money out just yet.
Instead, I’ll use the magic of compounding and continue to save $5 or more each week to invest in ASX shares, and I’ll watch that passive income build over time.
