Most Australians would like to build a passive income stream. After all, what’s not to like about getting money without having to exchange time for it? There are many potential sources of passive income available to Australians. These include traditional assets like term deposits and investment properties. But also more exotic sources of secondary income, perhaps drop shipping or owning a vending machine.
However, I still believe that the simplest, easiest and most accessible source of passive income for the average Australian is buying ASX dividend shares.
Dividend shares tick every passive income box. Most importantly, they provide a reliable source of income that is truly passive – requiring minimal ongoing time and effort once purchased. That stands in contrast to other passive income investments like property, which tend to require regular ongoing maintenance.
But buying ASX dividend shares is also simple and accessible. Any adult can do so. The only wrinkle Australians might find with dividend investing is that it does require a large amount of initial investment to get any kind of worthwhile returns.
With that in mind, let’s talk about how to build a passive income stream with ASX dividend shares.
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How can you get passive income from ASX dividend shares?
To start off with, you’ll need to pick an investment. Many people just stick with blue chip stocks like Commonwealth Bank of Australia (ASX: CBA), Woolworths Group Ltd (ASX: WOW), or Telstra Group Ltd (ASX: TLS). If you buy one of these companies’ shares, you are entitled to receive whatever dividends they declare, usually at a six-month interval. The current dividend yields on these shares are in a 2-4% range. That’s $2-4 per annum for every $100 invested.
Whenever I look at an ASX dividend share, I don’t just consider the upfront yield, though. It is also important to take into account how financially sound a company is. I also like to analyse a company’s dividend history and how fast it has grown its payouts. These factors, when put together, can paint a useful picture that shows us how likely a dividend share will become a compelling passive income investment.
It’s for this reason that two of my favourite passive income investments are Washington H. Soul Pattinson and Co Ltd (ASX: SOL), and MFF Capital Investments Ltd (ASX: MFF). Both of these companies have stellar track records of raising their dividends, which you can read more about here. Both companies have given me an annual dividend by rise every year I have owned them, and I love putting this passive income to use.
Fast-tracking your second income
So step one is finding the right ASX dividend shares and buying as many shares as you can afford. But doing this alone will take a long time to build up a meaningful passive income stream. Dropping $100,000 on a 4% yielding dividend share will only get you $4,000 a year in passive income, after all.
There are a couple of things you can do to get that passive income snowball rolling faster, though. The first is to buy more shares as often as you can. This is particularly impactful if you buy those shares during a share price slump or market downturn.
The second is by reinvesting any dividends you receive back into buying more shares. That pads out your snowball and can make a real difference to your wealth over time.
Buying ASX dividend shares won’t get you a huge stream of passive income straight away, unless you drop a huge amount of cash upfront. However, with time, patience, and compounding, it can be an incredibly effective way to build wealth as well as a source of secondary income.
