The median annual income for full-time workers aged 25 to 34 was $57,200 in the second quarter, according to the Bureau of Labor Statistics. That means after-tax earnings would be about $43,800 in the worst case scenario. Financial planners generally advise saving 20% of after-tax earnings for retirement, which would be $8,760 per year or $730 per month for the median earner.
Even a percentage of that figure invested wisely could grow into a sizable portfolio given enough time. For instance, history says $500 invested monthly in the Vanguard Dividend Appreciation ETF (VIG 0.68%) would be worth about $968,400 after three decades. The portfolio would initially generate about $16,000 per year in dividend income.
However, the underlying investment would continue to grow even without further contributions, so the dividend payout could be even larger by retirement, depending on when that occurs. For instance, the portfolio would reach $1.2 million after three more years, at which point it would generate about $19,800 in annual passive income.
Here are the important details.
The Vanguard Dividend Appreciation ETF provides diversified exposure to financially stable companies
The Vanguard Dividend Appreciation ETF tracks U.S. companies that have consistently raised their dividends for at least 10 years. It excludes dividend payers with yields in top 25% to avoid companies with unsustainable payouts or limited growth prospects.
The fund includes 337 domestic companies, comprising value stocks and growth stocks, with a median market capitalization of $197 billion. The dividend yield is currently 1.65%. The 10 largest holdings are listed by weight below:
- Apple: 4.6%
- Broadcom: 3.8%
- Microsoft: 3.7%
- JPMorgan Chase: 3.5%
- UnitedHealth Group: 2.9%
- ExxonMobil: 2.9%
- Visa: 2.2%
- Procter & Gamble: 2.2%
- Johnson & Johnson: 2.2%
- Mastercard: 2.2%
The Vanguard Dividend Appreciation ETF lets investors spread money across a group of companies with the financial stability needed to not only pay a regular dividend, but also to raise the payout consistently. It bears a below-average expense ratio of 0.06%, meaning the annual fees on a $10,000 portfolio will total just $6.
How to turn $500 per month into $16,000 in annual dividend income
The Vanguard Dividend Appreciation ETF has returned 473% since its inception in 2006, assuming dividends were reinvested, which is equivalent to 9.9% annually. At that pace, $500 invested monthly in the ETF would be worth $95,100 in one decade, $339,700 in two decades, and $968,400 in three decades.
As mentioned, the Vanguard ETF currently pays a dividend yield of 1.65%, which is slightly below the 10-year average of 1.9%. But I will use the smaller figure to ensure a conservative estimate. To that end, if dividends are no longer reinvested after three decades, the $968,400 portfolio will generate about $16,000 per year in dividend income.
Meanwhile, the underlying investment will continue to grow even without further contributions. For instance, when dividends are excluded, the Vanguard ETF has returned 7.6% annually since its inception. At that rate, the $968,400 portfolio would be worth $1.2 million after three more years, and that sum would generate about $19,800 in annual dividend income.
Importantly, the scenario I just described involved saving $500 per month. But the median worker should be saving about $730 per month, meaning we have yet to account for $230. That money (and additional capital) could be invested in individual stocks, as long as the investor does the requisite research. Alternatively, the money could be invested in an S&P 500 index fund, which provides diversified exposure to the most influential U.S. stocks.
