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How I’d use ASX dividend shares to retire early with a $50,000 per year portfolio

With signs of global economic growth slowing, I think now is the time to move from growth shares to dividend shares, and particularly those that are in defensive or non-cyclical industries.

Earnings in industries such as Consumer Staples and Energy tend to be less volatile throughout the economic cycle and I’ve chosen a few top ASX shares across these sectors that I would use to create $50,000 per year in dividend income to retire early on.

  1. AGL Energy Ltd (ASX: AGL)Energy

The AGL share price has been relatively stable in recent times and boasts an impressive 5% dividend yield including 55 cents per share (cps) in 1H19, franked to 80%.

AGL remains well-positioned as Australia’s largest energy “gentailer” (generator and retailer) despite existing headwinds in Australia arising from energy policy certainty and its effect on capital expenditure.

With a Labor government looking likely to come into power following the May 2019 Federal Election, AGL could benefit from a boost to renewable energy investment and I think there could be upside capital growth for the stock as well as maintaining its dividend yield.

The major risk to AGL’s upwards trajectory in my books is a regulatory crackdown in the form of pricing or competition, as its position in the traditionally defensive energy sector and sustained energy prices in eastern Australia should see profitability be maintained in the short to medium term.

  1. Wesfarmers Ltd (ASX: WES)Consumer Staples

Wesfarmers has been a staple of Aussie share portfolios for decades and has been significantly streamlined under CEO Rob Scott.

In the last 12-18 months, Wesfarmers has spun-off Coles Group Ltd  (ASX: COL) and sold its stakes in the Bengalla coal mine, Kmart Tyre and Auto Service (KTAS) and exited its failed Bunnings UK venture to focus on its core strategic priorities.

The Wesfarmers share price is up nearly 10% this year alone and 16.7% in the last year while still offering a juicy 5.80% dividend yield for investors.

Despite spinning off Coles, Wesfarmers’ diversification across industries and its status as a true conglomerate should see its portfolio-level earnings offset each other throughout the economic cycle.

  1. Australian Pharmaceutical Industries Ltd (ASX: API)Health Care

Australian Pharmaceutical Industries (API) is the largest wholesale distributor of pharmaceutical and allied health products with subsidiaries including Priceline and Priceline Pharmacy.

Offering a 5.34% dividend yield, API is another defensive stock that has capital stability and/or growth as well as providing a strong income option for investors’ portfolios. The API share price is up 6% this year and should see lower earnings volatility in the event of an economic downturn given many of the products it distributes are considered necessary goods rather than discretionary.

With Australian immigration continuing to drive population growth in the country, I’d expect to see operators in the Health Care sector cash in on a bigger market and greater revenue opportunities in years to come which could form a cornerstone of any early retirement portfolio.

Building the Portfolio

The three stocks I’ve selected above provide both capital stability (or growth) while also boasting an impressive 5% dividend yield each. I’d be placing AGL at the heart of the portfolio with a 50% allocation, with 30% in Wesfarmers and 20% in API shares.

By starting out with $500,000 in principal split across the three portfolios, investors could use the capital stability / growth to their advantage and reinvest the 5% dividends back into shares via a dividend reinvestment plan (DRP) to grow the shares at an average rate of $25,000 per year.

Within 15 years, the reinvested dividends at 5% would result in $1,039,464 of shares split across AGL, Wesfarmers and API shares. Investors could then unsubscribe from the DRP and have a yearly income of $51,973 ($1,039,464 x 5%).

The beauty of these three is that they can provide growth and stability in the short-term, which can be reinvested to grow shareholdings in each of the three non-cyclical industries while providing the flexibility to generate $50,000 a year in dividends when the time comes to kick back and relax.

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Motley Fool contributor Lachlan Hall has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Wesfarmers Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. 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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