How I’d invest $300 a month in ASX dividend shares to target a $30,000 annual second income

© Provided by The Motley Fool
A woman wearing glasses and a black top smiles broadly as she stares at a money yarn full of coins representing the rising JB Hi-Fi share price and rising dividends over the past five years

© Provided by The Motley Fool
A woman wearing glasses and a black top smiles broadly as she stares at a money yarn full of coins representing the rising JB Hi-Fi share price and rising dividends over the past five years

ASX dividend shares can be a very effective way for investors to grow another source of income.

The tricky thing about some asset classes is that they don’t generate good income. Property can require tens of thousands of dollars to start investing – for example, a $500,000 property purchase would need $50,000 just for a 10% starting deposit.

One of the best things about investing in ASX shares is that it can be done with a relatively small amount of money.

In this article, I’m referring to investing $300 per month but that could be just how much is set aside each month. Investors can choose to invest $900 each time, $2,000, or whatever other amount suits them. Saving $300 per month turns into $3,600 per year.

Share market returns

No one knows what the future holds. That’s why it takes optimism about the long term, and a bit of bravery, to invest in the ASX share market. It also helps to be patient during particularly volatile times. Some ASX dividend shares can be resilient during times like this.

But we can look to the past for insights into how the share market has previously performed. Over the past five years, Vanguard MSCI Index International Shares ETF (ASX: VGS) has returned an average of around 10% per annum, which is similar to the average share market’s return over the prior decades, so I’ll use that in building my portfolio for this idea.

If I were to invest $300 per month, and my portfolio achieved returns of 10% per annum, it would reach $57,000 after 10 years, $206,000 after 20 years and $592,000 after 30 years.

A dividend yield of 5.1% would generate $30,000 of annual dividends with a $592,000 portfolio. In this scenario, I’d only need to add $108,000 of my own money over three decades and the rest comes from compounding.

Which ASX dividend shares have a high dividend yield?

Dividend investing doesn’t necessarily mean that investors have to go for the highest yield possible. Certainly, a lower yield could be more sustainable.

An investor can mix and match different yields to make a portfolio have an average dividend yield of 5% (or more). For example, using Commsec estimates, these are some projected grossed-up dividend yields for FY24:

Wesfarmers Ltd (ASX: WES) shares could pay a grossed-up dividend yield of 5.9%.

JB Hi-Fi Ltd (ASX: JBH) shares could pay a grossed-up dividend yield of 7.1%.

Accent Group Ltd (ASX: AX1) shares could pay a grossed-up dividend yield of 9%.

Brickworks Limited (ASX: BKW) shares could pay a grossed-up dividend yield of 4.2%.

Sonic Healthcare Ltd (ASX: SHL) shares might pay a grossed-up dividend yield of 4.9%.

APA Group (ASX: APA) shares could pay a dividend yield of 5.5%.

A list of some leading ASX dividend shares might be a bit different in three decades from now, though I think Wesfarmers and Brickworks are likely to still be among the leaders because of their long-term focus in allocating money.

The post How I’d invest $300 a month in ASX dividend shares to target a $30,000 annual second income appeared first on The Motley Fool Australia.

More reading

Motley Fool contributor Tristan Harrison has positions in Brickworks. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Brickworks and Vanguard Msci Index International Shares ETF. The Motley Fool Australia has positions in and has recommended Apa Group, Brickworks, and Wesfarmers. The Motley Fool Australia has recommended Accent Group, Jb Hi-Fi, Sonic Healthcare, and Vanguard Msci Index International Shares ETF. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.