How to turn the ASX into a passive income machine

If you're looking to generate regular, reliable income without clocking into a job, you're not alone.

More Australians are turning to the stock market—particularly ASX shares and ETFs—as a way to build a passive income stream that works around the clock.

But how exactly do you turn the ASX into your personal income machine?

Growth first

Unless you are already sitting on a big cash balance, you are going to have to build up your investment portfolio first.

During this stage, it is arguably best to focus on ASX growth shares and blue chips that have the potential to compound over many years.

By investing what you can into these types of shares, you have a strong chance of building a portfolio of considerable size in the future. ASX shares like ResMed Inc (ASX: RMD) and Goodman Group (ASX: GMG) are examples of what to look for. They have strong business models, sustainable competitive advantages, and positive long term growth outlooks.

Reinvest dividends

In the early stages, it may be wise to reinvest all dividends. This allows the power of compounding to snowball your portfolio's value.

Over time, your holdings grow, and so does your passive income potential. When you're finally ready to tap into that income, you can simply switch off the reinvestment and start collecting the cash.

Focus on quality dividend payers

Once you are ready to focus on income, it is important to build a strong foundation.

This means targeting companies that not only pay dividends but have a track record of growing them over time.

Think of household names like Harvey Norman Holdings Ltd (ASX: HVN), Telstra Group Ltd (ASX: TLS), and Wesfarmers (ASX: WES). These blue-chip businesses typically offer stable earnings, which help support regular dividend payouts.

While their dividend yields can vary, these types of shares often yield 4% to 6% annually—sometimes more—providing a solid base of income.

Add high-yield ETFs for diversification

Exchange-traded funds (ETFs) are a great way to gain instant diversification while collecting dividends.

For example, the Vanguard Australian Shares High Yield ETF (ASX: VHY) targets companies with above-average dividend yields.

Another option is the Betashares Australian Top 20 Equity Yield Maximiser Fund (ASX: YMAX)

This fund targets strong quarterly income through a covered call strategy over a portfolio of the 20 largest blue-chip stocks on the Australian share market. The strategy allows the fund manager to generate additional income by selling call options on its holdings. This approach can enhance yield, particularly in a stable or gradually rising market.

Foolish takeaway

With smart planning, the ASX can absolutely become a machine that works for you—producing passive income through market cycles.

Focus on quality, diversify with income-oriented ASX ETFs, and before long, you could find yourself living off the steady drip of dividends.

The post How to turn the ASX into a passive income machine appeared first on The Motley Fool Australia.

Motley Fool contributor James Mickleboro has positions in Goodman Group and ResMed. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Goodman Group, ResMed, and Wesfarmers. The Motley Fool Australia has positions in and has recommended Harvey Norman, ResMed, and Telstra Group. The Motley Fool Australia has recommended Goodman Group, Vanguard Australian Shares High Yield ETF, and Wesfarmers. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2025