It's often only when investors start spotting retirement on their horizons that they start appreciating the power of owning ASX dividend-paying shares. Even many younger investors regard dividends as being 'for old people' – and are far more interested in the growth side of investing.
But ASX dividend shares can be a powerful force to harness – especially if you're interested in gaining financial independence as early as possible.
If you've got a ten-year plus investing horizon – focusing on dividends now can help you build a stream of passive income that you can consistently reinvest for higher future cash flow.
Once that cashflow becomes large enough, you will get to a stage where you can start paying your bills with it.
Hello, financial freedom!
How to choose ASX dividend shares for future cashflow
There are two camps that you can place a dividend-paying share into: mature payers and growth payers.
Mature payers are typically the shares you will hear about when people discuss dividends. You've got ASX banks like Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB) and maybe something like BHP Group Ltd (ASX: BHP) or Woolworths Group Ltd (ASX: WOW).
Investing in these companies today will get you a relatively large return on your capital upfront – say 6.66% in NAB's case (I wouldn't be too put off with that number of the beast here, just a coincidence).
But those kinds of yields rarely grow in a substantial manner. In fact, NAB's dividend had been flat for a few years before actually getting trimmed last year.
Thus, these yields are more suited to someone trying to maintain wealth and income rather than grow it (in my view, anyway).
But let's look at a dividend growth stock like Freedom Foods Group Ltd (ASX: FNP). Freedom Foods is a niche manufacturer of organic, allergen-conscious health foods and has been growing at a healthy pace over the last few years. Now, you might look at Freedom's current dividend yield of 1.11% and be slightly disappointed.
A bank account offers a better yield, right?
But consider this, if you had bought Freedom shares back in 2012 – your yield on cost today from Freedom's growing dividends would be over 9% per annum. And that would be on top of FNP shares gaining 730% during that period.
Since this company has been growing its dividend every year since 2014, your yield on cost is also going to increase with it.
Foolish Takeaway
It's through companies like Freedom Foods that you can use ASX dividend shares to help gain financial independence. It's not the easiest path to walk in investing, but one that can certainly pay… dividends… if done correctly.
