One of the best ways to ensure you're comfortable in retirement is to put yourself in a position to have steady income coming in. While Social Security is a great supplement, for many people, it won't suffice as the primary income source. When done the right way, dividend income can play a huge role in your financial security in retirement. However, just how effective it is will rely heavily on how many dividend-paying stocks you can amass on your way to retirement.
Here are three easy steps you can take to earn $3,000 in monthly dividend income in retirement.
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1. Be consistent
Establishing a solid income portfolio won't happen overnight; it will take time and consistency. To accomplish this, you should incorporate dollar-cost averaging into your investment strategy. Dollar-cost averaging involves investing set amounts of money at regular intervals, regardless of the stock's price at the time. For example, if you have $6,000 to invest, instead of investing the full amount at once, you can do the following:
- Weekly: $6,000 / 24 weeks = $250 each purchase
- Monthly: $6,000 / 6 months = $1,000 each purchase
- Quarterly: $6,000 / 2 quarters = $3,000 each purchase
Not only does dollar-cost averaging remove some of the emotions and desire to "time the market" from investing, but it also gets you in the habit of consistently investing -- something you'll need to do to accomplish your long-term financial goals.
2. Focus on dividend stocks
Most investors either focus on growth stocks or dividend stocks. While growth stocks can be good investments, many don't pay out dividends because the companies need to reinvest those profits to continue growing. Dividends are a way companies can reward investors for buying and holding on to their stock.
Dividends are presented as a percentage, called the dividend yield, of the invested amount, so the more you have invested, the larger the dividend payout. While there is no set dividend yield that's considered "good," dividend investors should look for companies and funds with at least a 2.5% yield.
Let's assume a household is able to save and invest for 30 years with an 8% annual return -- a little bit below the S&P 500 historical average. Here's how much it would have accumulated at different monthly contribution amounts:
| Monthly Contributions | Amount After 30 Years |
|---|---|
| $1,000 | $1.35 million |
| $1,250 | $1.69 million |
| $1,500 | $2.03 million |
Calculations by author.
Now, let's assume the invested amount went into an index fund like the Vanguard High Dividend Yield ETF, which focuses on companies with high-paying dividends and has a 2.8% dividend yield. At the dividend yield, here's how much the above savings would pay out monthly:
| Monthly Contributions | Amount After 30 Years | Annual Dividend Payouts |
|---|---|---|
| $1,000 | $1.35 million | $37,800 |
| $1,250 | $1.69 million | $47,320 |
| $1,500 | $2.03 million | $56,840 |
Calculations by author.
With those annual dividend earnings, you can receive monthly payouts of over $3,100, $3,900, and $4,700, respectively.
3. Utilize tax-advantaged accounts
While many people contribute to a 401(k) plan through their employer, it can work wonders to also contribute to a retirement account like a Roth IRA. Unlike a 401(k) plan, you contribute after-tax money into a Roth IRA. Since you've already paid taxes on your contributions, the money in your Roth IRA can grow and compound tax-free.
Being able to withdraw money from your Roth IRA in retirement without having to account for income taxes on it is a great benefit and can save you thousands over the long term. Roth IRAs are a resource you should definitely not overlook if you're eligible to make contributions to one.
