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The median weekly income for U.S. workers was $1,165 in the third quarter, which is roughly $60,500 per year, according to the Labor Department. That translates into after-tax income of roughly $45,000 per year even in the worst-case scenario. Financial advisors usually suggest saving 20% of after-tax income for retirement, which is $9,000 per year (or $750 per month) for the median worker.
However, workers can build a sizable investment portfolio that pays a significant amount of passive income by retirement with half that amount. To be clear, I am not suggesting that anyone should save less than 20% of their post-tax income, but rather pointing out that small sums invested regularly can build tremendous wealth over time.
Indeed, $375 invested monthly in the Vanguard High Dividend Yield ETF (NYSEMKT: VYM) could build a $569,400 portfolio over 30 years, and that portfolio could pay about $17,200 in annual dividend income. Here are the important details.
The Vanguard High Dividend Yield ETF
The Vanguard High Dividend Yield ETF tracks 537 large U.S. companies that are forecast to pay above-average dividend yields. The index fund is most heavily weighted toward value stocks in three stock market sectors: financials (23%), industrials (13%), and healthcare (11%).
The 10 largest holdings are listed by weight:
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Broadcom: 3.9%
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JPMorgan Chase: 3.8%
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ExxonMobil: 2.8%
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Home Depot: 2.3%
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Procter & Gamble: 2.2%
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Walmart: 2.1%
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Johnson & Johnson: 2%
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AbbVie: 1.7%
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Bank of America: 1.7%
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Chevron: 1.4%
Three qualities make the Vanguard High Dividend Yield ETF an attractive option, particularly for risk-averse investors.
First, it has a low expense ratio of 0.06%. That means the annual fees will total $6 on every $10,000 invested in the fund. Comparatively, Morningstar says the average expense ratio for all U.S. index funds and mutual funds was 0.36% in 2023.
Second, while the Vanguard High Dividend Yield ETF is unlikely to beat the S&P 500 (SNPINDEX: ^GSPC) during bull markets, it did outperform by eight percentage points during the last bear market. That's because the index fund tends to be less volatile. The Vanguard High Dividend Yield ETF has a three-year beta of 0.81, which means it moved 81 basis points for every 100-basis point movement in the S&P 500 during the last three years.
Third, patient investors who regularly buy shares of the Vanguard High Dividend Yield ETF can build a sizable portfolio that pays a substantial amount of dividend income each year. I'll walk through a specific example in the next section.
History says $375 invested monthly could create $17,200 in annual dividend income
The Vanguard High Dividend Yield ETF has achieved a total return of 349% since its inception in November 2006, which is equivalent to an annual return of 8.6%. That number may be skewed to the downside because the Great Recession started about a year later. Indeed, the Vanguard ETF returned 9.7% annually over the last decade.