I'm guess most people reading this article would love the idea of receiving a huge amount of passive income. ASX dividend stocks could be just what people need to create that future.
Many people in retirement have followed that exact strategy – they have built their portfolios enough to pay a substantial amount of dividends and fund their lives. We don't need to wait until we're 65 or 70 to build an appealing portfolio of dividends. Financial freedom can come at any age if we build up to it and regularly invest.
Businesses and their staff (including the CEO) work each year to make a profit, and then those companies can choose how much of that profit to pay to shareholders in the form of dividends. The growth of profit can lead to a rising share price and payout over time.
I think there's a key reason why dividends are so useful.
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Dividends can pay for expenses
As we live our lives, whether retired or not, we spend money.
Utilities need paying for. We (may) need to pay for a roof over our heads, food, transportation, and so on.
Those costs are money that comes out of our bank account, so we need money going into the account to pay for them. It's not like you can sell a brick of your house or sell 1 sqm of land to pay for those costs each week.
Receiving dividends into the bank account can be the cash flow we need to pay for those expenses.
Various companies on the ASX have pleasing dividend growth records and/or provide a good dividend yield. Some of the large ASX dividend stocks that I'm thinking of include Telstra Group Ltd (ASX: TLS), Coles Group Ltd (ASX: COL), Wesfarmers Ltd (ASX: WES), Washington H. Soul Pattinson and Co. Ltd (ASX: SOL), and Brickworks Limited (ASX: BKW). In addition, franking credits are a useful boost to the dividend yields from Australian companies.
A diversified portfolio of ASX dividend stocks can hopefully deliver a good dividend yield and earnings growth.
If we can eventually accumulate enough dividends, say $60,000 or $70,000, then this could be enough to pay for all of our life's expenses, or at least a substantial portion.
Passive income is more stable than share markets
I also think dividends make it easier to understand how much of a cash return we're probably going to get. One of the useful bonuses of the cash returns from ASX dividend stocks is that passive income payments can be much more consistent than share prices. That's because dividends are typically linked to profit, which doesn't change as much as share prices do each year.
In an ASX share bear market, it'd be understandable for share prices to fall because of worries about the economy. But, some dividends can continue to be stable (and even grow) during global economic downturns.
By owning high-quality ASX dividend stocks that have a good track record of paying dividends, financial freedom can be achieved and paid for.
