Many investors dream of earning a substantial passive income stream, but focusing on income too early can be a mistake.

Unless you're already swimming in cash, the smarter approach could be to first build a high-quality ASX share portfolio and let compounding do the heavy lifting.

Then, once the portfolio reaches a meaningful size, it can be reshaped to prioritise passive income generation.

The path to $50,000 in passive income with ASX shares

With an average return of 10% per annum (not guaranteed, but historically achievable in the share market), investing $400 per month could build a $1 million portfolio in 32 years.

Once that milestone is reached, the portfolio can be transitioned into high-quality ASX dividend shares yielding an average of 5%.

This would result in $50,000 in passive income in year one, with income growing by around 5% annually if the portfolio continues to generate a total return of 10% per annum.

Focus on growth first, income later

The best way to reach the $1 million target is to prioritise capital growth by investing in high-quality ASX stocks with strong long-term outlooks and durable competitive advantages.

Some great ASX growth shares that could fit the bill include:

WiseTech Global Ltd (ASX: WTC) – A logistics software powerhouse that is revolutionising global supply chains. Its sticky customer base, strong pricing power, and expansion potential make it a compelling long-term growth stock. The team at Goldman Sachs thinks it would be a great option. The broker has a buy rating and $128.00 price target on its shares.

Lovisa Holdings Ltd (ASX: LOV) – A global fast-fashion jewellery retailer with an impressive store rollout strategy. Its strong brand and ability to scale internationally give it significant growth potential. Bell Potter is positive on its long term outlook and has a buy rating and $30.00 price target on its shares.

Nextdc Ltd (ASX: NXT) – A leader in data centres, which is a sector benefitting from the rapid growth of cloud computing and AI. Its long-term contracts and mission-critical infrastructure could make it a great investment option. Goldman Sachs is bullish and has a buy rating and $17.10 price target on its shares.

Additionally, sprinkling in some international exposure is a wise move. ASX exchange traded funds (ETFs) such as BetaShares Nasdaq 100 ETF (ASX: NDQ) and iShares S&P 500 ETF (ASX: IVV) provide access to global tech leaders like Apple (NASDAQ: AAPL), Microsoft (NASDAQ: MSFT), and Nvidia (NASDAQ: NVDA), which have consistently outperformed over the long term.

Transitioning to passive income

Once the $1 million portfolio is built, the next step is to restructure it for dividend income. At that point, investors can gradually shift capital into high-quality ASX dividend shares.

It is impossible to say which shares that exist today would be great dividend options in 30 years.

But today, companies such as APA Group (ASX: APA), Coles Group Ltd (ASX: COL), Telstra Group Ltd (ASX: TLS), and Wesfarmers Ltd (ASX: WES) could be top picks for income investors to consider buying.

Foolish takeaway

Warren Buffett once stated the following:

The stock market is a device for transferring money from the impatient to the patient.

The key to generating substantial passive income is being patient and investing consistently in quality growth shares before eventually transitioning to dividend-paying stocks.

By following this approach, an investor could turn $400 per month into a $1 million ASX share portfolio, setting themselves up for a lifetime of growing passive income and financial freedom.