Dividends can be the foundation of a long-term investment strategy. They provide shareholders with passive income distributed from companies' excess profits. However, there is a misconception about dividend stocks.
Some people think that because you need a lot of shares to have enough dividend income to live on, only deep-pocketed individuals should be dividend investors. That's not true.
I'll show you how $100,000 in annual dividend income can be yours with $200 invested monthly and enough time.
The math checks out
First, I'll admit that $200 per month is still a lot of money for some people, but many Americans can afford to set that aside to shore up their financial futures. The average car payment in the United States is over $700 for new and $500 for used vehicles. A few dinners and nights out on the town can easily add up to $200. If possible, you should do your best to save this $200 from your monthly income.
Then, take that $200 each month and invest it in dividend stocks and funds.
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With an average dividend yield of 3%, roughly 8% annual returns on your portfolio (slightly trailing the broad market), dividend payout increases of 5% each year, and your dividends reinvested, your portfolio will be worth more than $1 million after 30 years. That's enough to give you $100,000 in steady dividend income. Not only do dividends provide income without selling shares, but you'll keep getting those payout raises as long as the businesses you invest in perform well.
Here is a great ETF to consider
If you see the potential of this saving and investing strategy but don't know where to start with your portfolio, the easiest option is an exchange-traded fund (ETF). These funds hold groups of stocks while trading under a single ticker symbol. The Schwab U.S. Dividend Equity ETF (SCHD -0.10%), for example, is designed to track the total return performance of the Dow Jones U.S. 100 Dividend Index, a basket of 100 U.S. companies whose stocks pay dividends.
The fund has generated an annualized total return of 11.2% over the past decade, and it currently offers a 3.6% yield (even more than the baseline used in the above scenario). Its top holdings include a list of blue-chip stocks, including Amgen, AbbVie, Chevron, and PepsiCo. Those four stocks make up about 17% of the total fund.
Investors can easily diversify their portfolios with just a handful of ETFs like this one. There are funds for conservative investors and those looking for dividend growth. Funds can also focus on specific industries, allowing you to build your portfolio according to your risk tolerance and goals.
How to implement it for yourself
Getting started is intimidating, but you can automate much of the process once you get it going. Start with an investment account. There are regular taxable accounts and retirement accounts, such as a Roth IRA, that have rules but offer tax benefits.
Once you decide on an account, automate a scheduled deposit from your bank right to your investment account. Invest those deposits as they come (this can also be automated), and don't worry about whether the market is up or down or what you read on the news. Predicting where the stock market will go in the near term is impossible, so don't lose sleep over day-to-day volatility.
Time is your most powerful advantage as an individual investor, and thinking in years (preferably decades) is what allows you to benefit from the stock market's long-term upward trend. With your dividends reinvested year after year, you'll be building a potentially life-changing income stream.
