Retirement is an important stage of life to get right. People ideally enter retirement with a nicely-sized nest egg. With the best days of employment earnings likely behind them, receiving income from a retirement fund could be essential. Certainly, ASX dividend shares could help.
The Australian Financial Review reported that over the next decade, around 3.6 million Australians will move from the accumulation phase to the retirement phase with their superannuation, according to deputy chair of the Australian Prudential Regulation Authority (APRA) Helen Rowell. This could affect $750 billion in savings.
The newspaper quoted the principal of Moran Partners Financial Planning, Paul Moran, who said:
Average punters have no idea about how retirement income works. They understand saving for their retirement but are not sure how they get an income.
There are a number of different sources of potential income. Online savings accounts and term deposits are finally offering a good interest rate. Property rental yields are getting better and improving every month as property prices fall. However, remember that the gross rent yield and net rent yield for property are not the same.
ASX dividend shares can also play a very useful role in developing a passive income stream.
Each household's circumstances are different, with different goals and objectives. This is where a financial planner could be very useful to create a plan.
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How ASX dividend shares can help
There are plenty of ASX dividend shares that are able to offer investors a higher dividend yield than other assets can typically offer.
For example, Westpac Banking Corp (ASX: WBC) is expected to pay a grossed-up dividend yield of 8.4% in FY23, which is much higher than what its term deposits are currently offering. But term deposits are guaranteed, and the capital is also protected. Share prices can be very volatile.
Historically, share prices for plenty of businesses have gone on to recover from a widespread market drop. Just look at what happened after the GFC and the COVID-19 crash – the market went on to new heights. But that doesn't mean that it's not painful when investors go through volatility.
Not only can ASX dividend shares pay a good dividend yield, but some of them also have the ability to grow profit over time. This enables them to grow dividends and, hopefully, lead to a rising share price over time.
Examples of businesses that have grown their dividend for a number of years include Washington H. Soul Pattinson and Co. Ltd (ASX: SOL), Brickworks Limited (ASX: BKW), Sonic Healthcare Ltd (ASX: SHL), Rural Funds Group (ASX: RFF), and APA Group (ASX: APA).
Investors could also use ASX exchange-traded funds (ETFs) to invest in a broad range of businesses on the ASX, or internationally, to achieve significant diversification through one investment.
Foolish takeaway
ASX dividend shares can be a great way for an investor to generate more passive income from their investments but, generally, the higher the yield, the less consistent that dividend may be.
I'm building a portfolio of ASX dividend shares that I believe can keep growing dividends and pay for my life expenses in the future, so I fully believe in this strategy.
