Building wealth and generating passive income through ASX shares is a long-term game, but with a combination of consistency and the right strategy, it could lead to financial freedom.
By investing just $500 a month into high-quality companies or exchange-traded funds (ETFs), investors can amass a significant portfolio over time.
And once that portfolio reaches a sufficient size, shifting the focus towards strong dividend payers can provide a reliable passive income stream. Here's how to do it.
Building wealth with ASX shares
The first step in this journey is wealth accumulation. By investing $500 per month into ASX shares and earning an average annual return of 10%, an investor could grow their portfolio to approximately $1 million in 30 years.
It is worth noting that while a 10% return is not guaranteed, it is in line with the historical average return of the share market. So, it certainly is a fair long-term target.
Investing in high-quality growth companies or broad-market ASX ETFs could be the key to achieving returns of this level (or better).
Companies such as Xero Ltd (ASX: XRO), ResMed Inc. (ASX: RMD), and Goodman Group (ASX: GMG) all have the characteristics to look for when investing for the long term. They are market leaders, have significant growth runways, and sustainable competitive advantages.
Alternatively, rather than trying to pick individual stocks, investors can gain diversified exposure to top-performing companies through ASX ETFs such as the iShares S&P 500 ETF (ASX: IVV) and the Betashares Nasdaq 100 ETF (ASX: NDQ).
The iShares S&P 500 ETF provides exposure to 500 of the largest U.S. companies. This includes the likes of Apple, Microsoft, and Amazon, as well as companies from the financial, consumer, mining, and healthcare sectors.
Whereas the Betashares Nasdaq 100 ETF has a heavy focus on technology companies. This includes major tech giants like Nvidia and Alphabet.
Whichever route you take, by consistently investing month in, month out, investors can leverage the power of compounding and market growth to build a sizeable portfolio.
Shifting to passive income
Once an investor has accumulated a $1 million portfolio, the focus can shift from capital growth to generating passive income. One of the best ways to do this is by investing in ASX dividend shares that provide consistent and attractive yields.
There are many companies out there that have a strong dividend-paying history, offering dividend yields of around 5% or higher. By investing in these shares an averaging a 5% yield across a portfolio, an investor with a $1 million portfolio could $50,000 per year in passive income.
Some strong ASX dividend payers include Accent Group Ltd (ASX: AX1) and Telstra Group Ltd (ASX: TLS). Alternatively, investors could opt for ETFs focused on dividend income, such as the Vanguard Australian Shares High Yield ETF (ASX: VHY), which holds a portfolio of high-dividend-paying Australian shares.
Foolish takeaway
Turning $500 per month into a $50,000 annual passive income stream is achievable with discipline, patience, and a smart investing approach.
By focusing on wealth accumulation through high-growth investments in the early years and shifting to strong dividend payers later on, investors can create a sustainable and rewarding passive income strategy.
And while market fluctuations are inevitable, a long-term perspective and a diversified portfolio can help smooth the ride and maximise returns over time.
The post How to turn $500 into $50,000 of passive income a year with ASX shares appeared first on The Motley Fool Australia.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Motley Fool contributor James Mickleboro has positions in Accent Group, BetaShares Nasdaq 100 ETF, Goodman Group, and Xero. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Alphabet, Amazon, Apple, BetaShares Nasdaq 100 ETF, Goodman Group, Microsoft, Nvidia, Xero, and iShares S&P 500 ETF. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has recommended the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool Australia has positions in and has recommended BetaShares Nasdaq 100 ETF, Telstra Group, and Xero. The Motley Fool Australia has recommended Accent Group, Alphabet, Amazon, Apple, Goodman Group, Microsoft, Nvidia, Vanguard Australian Shares High Yield ETF, and iShares S&P 500 ETF. 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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