The median annual income for full-time workers aged 25 to 34 was $59,800 during the third quarter, according to the Bureau of Labor Statistics. That means after-tax earnings would be about $45,400 in the worst-case scenario. Financial planners usually recommend saving 20% of after-tax earnings for retirement, which would be $9,080 per year (or about $750 per month) for the median worker.
Even a portion of that figure invested wisely could build a substantial portfolio given enough time. History says $500 per month in the Vanguard Dividend Appreciation ETF (VIG 0.93%) could be worth about $986,900 after three decades. And the portfolio would initially generate about $15,700 per year in passive income.
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Vanguard Dividend Appreciation ETF tracks more than 300 stocks that have consistently raised their dividends
The Vanguard Dividend Appreciation ETF measures the performance of 338 U.S. stocks that have regularly raised their dividends each year for at least a decade. It excludes stocks with dividend yields in the top 25% to avoid companies with unsustainable payouts and minimal growth prospects.
The index fund currently pays a dividend yield of 1.6%. It includes stocks from every market sector, apart from real estate, but it's heavily weighted toward information technology (27%), financials (22%), and healthcare (17%). The top 10 holdings are listed below:
- Broadcom: 6.6%
- Microsoft: 4.4%
- Apple: 4.1%
- JPMorgan: 4%
- Eli Lilly: 3.9%
- Visa: 2.5%
- ExxonMobil: 2.3%
- Johnson & Johnson: 2.2%
- Walmart: 2.2%
- Mastercard: 2.1%
Investors can think of the Vanguard Dividend Appreciation ETF as a complete portfolio that includes hundreds of companies with the financial strength to not only pay a dividend but also consistently raise the payout. The fund has an expense ratio of 0.05%, which means shareholders will pay $5 per year on every $10,000 invested. That is well below the average expense ratio of 0.73% among similar funds.
The Vanguard Dividend Appreciation ETF could turn $500 per month into $15,700 in annual dividend income
Since its creation in 2006, the Vanguard Dividend Appreciation ETF has returned 563% (if dividends were reinvested), which is equivalent to an annual return of 10%. At that pace, $500 invested monthly in the fund would be worth about $986,900 after three decades.
As mentioned, the Vanguard ETF currently pays a dividend yield of 1.6%, which is slightly lower than the 10-year average of 1.8%. I will use the current payout to keep my estimate conservative. So, if shareholders stop reinvesting dividends after 30 years, the $986,900 portfolio will generate $15,700 per year in dividend income.
Meanwhile, the underlying investment will continue growing without further contributions. For instance, excluding dividends, the Vanguard Dividend Appreciation ETF has returned 310% since its inception, which is equivalent to 7.8% annually. At that rate, the $986,900 portfolio would be worth $1.2 million in another three years, and that sum would generate about $19,200 in annual dividend income.
Any additional money could be invested in funds that track the S&P 500 or the Nasdaq-100
The strategy described in the previous sections involved saving $500 per month. But the median worker aged 25 to 34 should be saving about $750 per month. That means we have yet to account for $250. You could invest that money (and any additional cash) in individual stocks, especially artificial intelligence stocks, provided you are willing to do the necessary research.
Alternatively, anyone interested in keeping research to a minimum could put money in an exchange-traded fund that tracks the S&P 500, an index that includes 500 of the most influential companies in the world. There are several good options, but the Vanguard S&P 500 ETF is particularly compelling due to its low expense ratio of 0.03%.
Finally, investors with a high risk tolerance could invest some money in the Invesco QQQ Trust, an exchange-traded fund that tracks the Nasdaq-100. That option is particularly compelling because the Nasdaq-100 is heavily weighted toward stocks in the technology sector, which was the best-performing market sector by a very wide margin during the last decade.
