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Earn $500 in Monthly Retirement Dividends With 3 Easy Steps

By Catherine Brock - Jul 17, 2021 at 5:46AM

Key Points

  • When selecting a dividend fund, stock quality and dividend reliability are as important as yield.
  • Give yourself plenty of time to grow your dividend-paying position.
  • Don't stop investing due to temporary market cycles.

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Your retirement income action plan is here.

You could use another $500 monthly in retirement income, right? That could cover your grocery bill, a car payment, or even your entertainment fund. It's an achievable goal, too, if you're ready to follow three easy steps.

In a nutshell, you'll choose a quality dividend fund, invest in it monthly, and stick with that program for the long term. Read on for an outline of each step, plus a list of suitable funds, four different investment timelines, and a primer on how to handle a market downturn.

Smiling couple reviews paperwork at table at home.

Image source: Getty Images.

1. Choose a quality, low-cost dividend fund

Your first step is to choose a quality dividend fund with a low expense ratio. Here are four quick tips to remember as you research your fund options:

  • Look at and beyond the fund's dividend yield. The yield is important, but no less important than the quality of the companies in the fund's portfolio. A moderate dividend yield that's reliable is a better choice than a high dividend yield that's not sustainable.
  • Review the fund's investment strategy. Identify how the fund chooses the dividend stocks in its portfolio. Compare how different funds screen for quality and/or dividend reliability.
  • Check the fund's expense ratio. The expense ratio represents what the fund charges you for its operating expenses. Lower is better.
  • Look at the stocks in the portfolio. Since you're going to hold this fund for a long time, you want to see a portfolio filled with big companies you recognize.
  • Many funds pay dividends quarterly and not monthly. A quarterly payment shouldn't be a deal-breaker unless you really struggle to budget your cash.

You can kick off your research with the four funds shown in the table below. All are well-established, have expense ratios of 0.35% or less, and yield between 1.6% and 3%.

Fund Name

Fund Size

30-day SEC Yield

Expense Ratio

iShares Core Dividend Growth ETF (DGRO 1.53%)

$19.6 billion

2.05%

0.08%

Schwab US Dividend Equity ETF (SCHD 1.51%)

$26.3 billion

2.99%

0.06%

Vanguard Dividend Appreciation ETF (VIG 1.44%)

$72.2 billion

1.67%

0.06%

SPDR S&P Dividend ETF (SDY 1.39%)

$19.6 billion

2.47% 

0.35%

Table data source: iShares, Schwab, Vanguard, SSGA.

Note that if you're investing within a 401(k), you may not have access to these exact funds. You can still use them as points of comparison to help you evaluate the dividend funds available in your 401(k).

2. Invest in your fund each month

Your next step is to start investing in your fund each month. To reach the $500 income goal, you'll need to amass about $300,000 in a dividend fund that yields 2%, or $6,000 annually. The table below shows the monthly contributions required to reach that $300,000 milestone for different timelines.

Monthly Investment

Number of Years

Ending Balance

Monthly Dividends at 2% Yield

$265

30

$300,000

$500

$400

25

$300,000

$500

$610

20

$300,000

$500

$1,000

15

$300,000

$500

Table data source: Author calculations.

There are two important assumptions baked into this data. First, these numbers represent an average annual investment growth of 7%. That's the long-term average growth of the stock market after inflation. It's a reasonable growth expectation -- but only if you reinvest your dividends.

The second assumption is that you won't be paying taxes on your annual dividends. That means you should be investing within a 401(k) or an IRA.

3. Stay the course

The last step in this process may be the most challenging. You have to stick with those monthly contributions for a long time.

Over the course of 15 or 30 years, you'll see the stock market rise and fall, but don't let it shake you off course. You might need to switch to a different fund if the one you started with no longer suits your needs or changes in some fundamental way. But you shouldn't stop investing due to market cycles.

If you start to feel nervous about investing in a turbulent market, think about this: When share prices are down, two big things happen with dividend funds. One, the dividend yield rises. And two, your monthly investment buys you a higher number of shares. And the faster you accumulate those dividend-producing shares, the faster you'll reach your retirement income goals.

Catherine Brock has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Vanguard Dividend Appreciation ETF. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Schwab Strategic Trust - Schwab U.S. Dividend Equity ETF Stock Quote
Schwab Strategic Trust - Schwab U.S. Dividend Equity ETF
SCHD
$77.24 (1.51%) $1.15
Vanguard Specialized Funds - Vanguard Dividend Appreciation ETF Stock Quote
Vanguard Specialized Funds - Vanguard Dividend Appreciation ETF
VIG
$157.95 (1.44%) $2.24
SPDR Series Trust - SPDR S&P Dividend ETF Stock Quote
SPDR Series Trust - SPDR S&P Dividend ETF
SDY
$130.89 (1.39%) $1.79
iShares Trust - iShares Core Dividend Growth ETF Stock Quote
iShares Trust - iShares Core Dividend Growth ETF
DGRO
$52.31 (1.53%) $0.79

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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