How to Generate Over $50,000 in Annual Dividends by the Time You Retire
Having an extra $50,000 per year in retirement can alleviate concerns about whether you'll have enough money saved up by the time you stop working. And it's possible to accomplish that even if you don't have a big lump sum of money to invest right now. But you will need time.
If you have 30 years to go before you plan to retire, I can show you how you can turn a recurring $300 monthly investment into some fairly safe exchange-traded funds (ETFs) into $50,000 in annual dividend income.
Start with growth, then focus on dividends
You can't generate a large number of dividends without having built up a big portfolio first. If the goal is to get to $50,000 in annual dividends, then you'll need to aim for a portfolio worth more than $1 million, which would mean you need to collect a yield of approximately 5% to earn that level of dividend income.
But for the sake of being conservative, let's aim for $1.3 million, which would mean you can make $50,000 in dividends with a yield of 3.8%. A more modest yield can help you keep your risk fairly low during retirement by not having to aim for a high payout.
Growing your portfolio to $1.3 million may seem daunting unless you focus on growth investments first. If you have 30 investing years left, then even if there are a few off years when the markets aren't doing well and growth stocks are struggling, that won't necessarily derail your overall trajectory. Over the long term, quality growth stocks will normally rise in value.
Some growth stocks are, however, riskier than others. One way to reduce your overall risk is by holding ETFs rather than individual stocks. With ETFs, you can own dozens and even hundreds of stocks through a single investment. That brings your overall risk down, and you can still generate great long-run returns.
Two examples of top growth funds you can invest in are the Invesco QQQ Trust (NASDAQ: QQQ), which holds the top 100 non-financial stocks on the Nasdaq exchange, and the Technology Select Sector SPDR Fund (NYSEMKT: XLK), which will give you exposure to the tech sector of the S&P 500. Either fund can make for a good option to invest money into each month. You may even want to invest in both.
Over the past 10 years, the Technology Select fund has generated total returns (including dividends) of more than 520%, which is superior to the Invesco Fund's 415% gains over the same period. Tech stocks have done exceptionally well in recent years, but in the future that could change, which is why putting money in both of these investments could be a good move to make.
But even with the Invesco Trust, you still would have been averaging a compound annual growth rate (CAGR) of 17.8% during that stretch, which is an excellent return. By comparison, the Tech Select fund has averaged a CAGR of just over 20%. Both have made for stellar investments.
A high-annual return can reduce how long you need to stay invested
Assuming you can average an annual return of 17% or better may be optimistic over a period of 30 years and would certainly be a best-case scenario. Below is a table showing you how many years it would take for a $300 monthly investment to grow to $1.3 million at more modest annual-growth rates of between 10% and 15%.
Annual Return | Years | ||
|---|---|---|---|
| 20 | 25 | 30 |
10% | $227,811 | $398,050 | $678,146 |
11% | $259,691 | $472,840 | $841,356 |
12% | $296,777 | $563,654 | $1,048,489 |
13% | $339,973 | $674,127 | $1,311,981 |
14% | $390,350 | $808,748 | $1,647,891 |
15% | $449,172 | $973,059 | $2,076,984 |
Calculations by author.
To get to $1.3 million over a 30-year period, you would need to average an annual return of approximately 13%. While a slightly better return could help accelerate your portfolio's growth, you would still likely need 30 investing years to get to $1 million or more unless you are able to invest more than $300 per month.
Once you have a balance of $1.3 million or around there, you could invest in many dividend-focused ETFs, such as the SPDR Portfolio S&P 500 High Dividend ETF, where the yield today is 4.3%. At that rate, a $1.3 million portfolio would generate around $56,000 per year in annual dividends. However, there are many other dividend funds which could also provide you with high payouts. The key is to build up that balance, as that will open up many options for you in the future.
ETFs can be the easiest and best way to grow your portfolio
As tempting as it may be to buy shares of a hot-tech stock, a good ETF (such as the Invesco Fund or the Technology Select Sector ETF) can make your investing strategy not only easier, it can also keep your risk low while also putting you on a path to generate some great returns over the years. And if you can do that, generating a lot of dividend income won't be as difficult by retirement, as you'll have a large balance to use to your advantage.
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David Jagielski has no position in any of the stocks mentioned. The Motley Fool recommends Nasdaq. The Motley Fool has a disclosure policy.
How to Generate Over $50,000 in Annual Dividends by the Time You Retire was originally published by The Motley Fool