If you accumulate a large enough balance, you can generate a lot of dividend income without having to target high-yielding, risky investments.
Trying to predict how much money you’ll need for retirement can be difficult. Inflation is a reminder that you may need more than you expect, and having a bit of a buffer can provide you with some much-needed security later on in life. Whether it’s to help pay for medical bills or to fund a vacation, that extra money can go a long way in making your life a whole lot easier in the future.
If you start investing early and are able to put aside $250 each month in an exchange-traded fund (ETF), that can help you build up a big nest egg to live off later on and use that to generate some significant income. Below, I’ll show you how this strategy can help you collect $35,000 in annual dividends.
Investing in a growth-oriented ETF is an easy way to build up a big balance
Whether you’re investing a big lump sum today or putting aside money every month, an ETF can make the investing process a whole lot easier. Stock picking can be fun and challenging, but it can also be tedious and time-consuming. For investors who would prefer to keep things simple and not have to worry about the latest trends in tech or economic forecasts, putting money into an ETF can make the investing process a lot less daunting.
This is where the Vanguard Growth Index Fund ETF (VUG 0.38%) comes in. This ETF focuses on large-cap stocks with promising growth potential. In addition to big tech names like Nvidia and Microsoft, the fund will also give you exposure to top growth stocks such as Eli Lilly and Visa, which are among its top 10 holdings. For long-term investors, what’s also key is that the fund charges a minuscule expense ratio of just 0.04%. Those fees can add up over time, and by keeping them low, you’ll keep the vast majority of your profits.
Over the past 10 years, the Vanguard ETF has generated returns of around 300% when including dividends. That averages out to a compounded annual growth rate of 14.9%. The longer you invest, the harder it’ll be to average that high a return given the inevitable down years that the markets will experience along the way. But you can still be in a position to earn a great return by investing in the fund.
How much could your balance grow over 30 years?
If you were to invest $250 per month every year, for 30 years, you would have contributed $90,000 in total. But if this ETF were to rise at a more modest rate of around 12% per year, that would mean if you invested $250 into it every month, your portfolio could grow to be worth over $873,000 after 30 years. In comparison, if you were to remain invested for 25 years, then it would be worth around $470,000 (assuming the same annual growth rate).
A big benefit when it comes to compounding is that once that balance starts to get big, so too do your annual gains. That’s why there is a huge incentive to keep the money invested as long as you can afford to do so.
Turning that balance into a steady stream of dividend income
If you have built up a portfolio worth approximately $873,000, then you would want to target another fund that pays a yield of around 4%. By doing that, you could expect to generate $35,000 in annual dividends. You can try targeting higher-yielding investments to try to accumulate even more dividend income, but that can involve taking on more risk along the way. After building up such a big nest egg, the last thing you would want to do is put it at risk by being a bit too greedy.
By aiming for around 4%, however, you are likely to find a good balance between high dividends and safety, which won’t put your portfolio at risk. The SPDR Portfolio S&P 500 High Dividend ETF currently provides investors with a fairly high-yielding option, as it pays just under 4.1% right now. But there are other ETFs that can also make for good, diverse income options to consider.
Returns aren’t a guarantee, but the strategy is a solid one
Whether you end up averaging a 12% return, or 13% or 11%, is impossible to predict when looking at a 30-year period. But investing in the stock market and focusing on growth stocks is a sound strategy for growing your savings in the long run. In the end, you’ll likely be far better off by doing that than by simply putting your money in the bank.
David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Microsoft, Nvidia, Vanguard Index Funds-Vanguard Growth ETF, and Visa. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
