Do you need passive income? Turn $5,000 into $800 every month

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Wouldn’t it be nice to be paid $800 each month without having to lift a finger?

Well, I have some good news for you! It is possible to generate this level of monthly passive income starting with a modest $5,000 investment.

Getting started

First, let’s address the elephant in the room. Obviously, $5,000 isn’t enough to generate meaningful monthly passive income from the off.

Even if you put those funds in New Hope Corporation Limited (ASX: NHC) shares, which are expected to provide a ridiculously good 31% dividend yield this year thanks to strong coal prices, you would be looking at income of approximately $129 a month.

Furthermore, putting all your eggs in a coal miner’s basket would be a risky play.

So, what do we need to do?

What we’re going to have to do is take that $5,000 and turn it into a larger sum of money to collect dividends from.

In order to have a passive income of $800 a month, you’ll need annual dividends totaling $9,600.

Based on the Australian share market’s historical average dividend yield of approximately 4%, this means we would need to grow our portfolio to $240,000.

Going from $5,000 to $240,000 is going to take a long time (41 years) earning an average return of 10% per annum, which is the historical average of Wall Street’s S&P 500 index.

If you are happy to play the long game, then you’re sorted. But if you want to speed things up, you’re going to have to make some annual contributions to your portfolio.

For example, if you’re able to invest $5,000 into the share market each year, you’ll have grown your portfolio to just under $250,000 after 17 years if you earned the aforementioned 10% annual return.

And while it is worth remembering that past performance is not a guarantee of future returns, I would be disappointed if the market underperformed its historical average over the next couple of decades.

Which shares should you buy?

If you’re happy with earning the market return, then you could simply look at buying some index-tracking ETFs such as the Vanguard Australian Shares Index ETF (ASX: VAS) p Betashares Nasdaq 100 ETF (ASX: NDQ).

Alternatively, you could look to beat the market by buying a diversified group of ASX shares that have strong business models, quality management teams, and significant long-term growth potential.

A few companies that tick these boxes for me include gaming technology companies Aristocrat Leisure Limited (ASX: ALL), property listings company REA Group Limited (ASX: REA), and sleep treatment company ResMed Inc (ASX: RMD).

Finally, once your portfolio has reached the desired size, you can then change your focus from growth to income and sit back and watch that passive income roll in.

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