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How ASX dividend shares can help you retire early

Sebastian Bowen
stack of coins spelling yield

I have yet to meet an investor who doesn’t enjoy receiving dividend payments from ASX shares. Not only do dividends mean regular passive income, but the franking credits that often come attached are a boon when it comes to tax time.

But it’s my view that many investors still underestimate the power of dividend growth investing – and its potential to help assist an early retirement.

Sure, ASX banks like Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX: WBC) can offer you a relatively strong upfront yield on your capital. But I don’t expect these yields to grow at a healthy pace over the next few years or even through the 2020s. In fact, National Australia Bank Ltd (ASX: WBC) and Westpac have gone the other way, cutting dividend payments to their shareholders in 2019.

Dividend growth stocks are the key

But take a stock like CSL Limited (ASX: CSL). CSL has long been in ‘growth mode’, but started paying out some of its earnings in 2013 as a dividend – albeit a small one back then of US$1.08 per share. Fast forward to today, and CSL’s dividend yield doesn’t look that impressive at 0.82% (on current prices).

But the dividend has still grown since 2013 – and grown well. In 2019, CSL paid out US$1.85 in dividend payments. That means that if you bought CSL shares back in 2013, your yield-on-cost would now be roughly 4.73% (accounting for the exchange rate).

If CSL keeps this dividend growth rate going, in another 6 years, this yield would be substantially higher still.

That’s why I believe finding the right dividend growth stocks can build up enough passive cash flow over time – and eventually even help you to retire early.

I think the potential for future yield is the key for high dividend income, rather than the current yields currently available on some of our biggest ASX blue-chips.

Some other ASX dividend growth stocks that have also caught my eye for this reason include REA Group Ltd (ASX: REA), Altium Limited (ASX: ALU) and Ramsay Health Care Ltd (ASX: RHC).

Foolish takeaway

Although ‘retiring early’ is a bit of a buzz phrase these days, I truly think the right attitude to ASX dividend investing can assist in this process. Rather than buying Wesfarmers Ltd (ASX: WES) today, the real key is finding the next Wesfarmers to reap the (literal) dividends tomorrow.

The post How ASX dividend shares can help you retire early appeared first on Motley Fool Australia.

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Sebastian Bowen owns shares of National Australia Bank Limited. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of CSL Ltd. The Motley Fool Australia owns shares of Altium, National Australia Bank Limited, and Wesfarmers Limited. The Motley Fool Australia has recommended Ramsay Health Care Limited and REA Group 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.

The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2019