Aussies wanting to quit work could be well-served by ASX dividend shares to deliver retirement income.
Australian companies have the capability to pay a rewarding stream of cash flow in the form of dividends. We can be more than just customers of businesses like Coles Group Ltd (ASX: COL) and Telstra Group Ltd (ASX: TLS); we can own a small piece of them, too.
In this article, we'll examine how much money someone would need to invest in some of these ASX dividend shares to generate a rewarding level of retirement income.
Dividends
The dividend yield of a company will tell us how much income a business is paying.
It's somewhat similar to the interest rate from a bank account, though dividends are not certain, like the next interest payment.
If a bank account had a 4% interest rate, having $100 in the account should yield $4 of interest over 12 months.
If a business has a dividend yield of 4%, then $100 in that share should yield $4 in dividends over 12 months.
Having $100,000 in shares with an overall dividend yield of 4% would generate an annual income of $4,000.
As I mentioned, companies can deliver profit growth by selling more products, winning more subscribers, increasing prices, or using whatever method the business uses to achieve revenue growth.
If the profit rises, then the dividend per share could also be increased.
Stability is important
Dividend stability is an important element of the picture, in my opinion.
We know that whatever interest rate bank accounts have, they'll pay that rate until it changes.
As I've mentioned, dividends are not guaranteed to stay at the same level. Payouts from good companies can rise, while troubled businesses could cut their dividends.
Investors may need resilient payments because they're relying on that retirement income to pay for their spending.
For example, businesses like Fortescue Ltd (ASX: FMG) and Westpac Banking Corp (ASX: WBC) have seen significant volatility in dividend payments over the last five years, including reductions.
Whereas, ASX dividend shares like Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) and APA Group (ASX: APA) have both grown their annual ordinary dividend payments in each of the last 20 years. Of course, those payouts are not guaranteed, either. Various other companies have dividend growth streaks that stretch back five or ten years.
$4,000 per month of retirement income
Receiving $4,000 per month translates into an annual total of $48,000, excluding the need to pay any income taxes.
With a 4% dividend yield, it'd take a required portfolio size of $1.2 million to make that cash flow of $48,000.
Of course, having a higher dividend yield would mean less of a required nest egg. For example, a 5% average dividend yield would 'only' need a $960,000 value.
It's a large figure, but over a lifetime, investors can save towards that figure or even more. Someone's superannuation savings can be a big part of the overall picture.
Not all retirees will be lucky enough to have $1 million portfolios right now, but plenty may do.
Growth can help achieve the goal
For Aussies not approaching retirement, keep in mind that we don't need to save $1.2 million of cash ourselves.
The power of compounding can help grow a smaller amount into a much larger amount. Businesses can grow profit and increase their underlying value. We can also reinvest the dividends we receive to buy new shares.
For example, if an ASX share delivers investment returns of an average of 10% per annum in 15 years, a $10,000 investment grows to become more than $40,000, according to a compound interest calculator.
Using the same returns and time period, a $250,000 balance could grow to $1.04 million in 15 years if it grows at 10% per annum.
For investors that have 25 or 30 years, we have lots of time to grow our wealth.
