How $250 a month can generate $35,000 in annual dividend income

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 a little buffer can give you much-needed security later in life. Whether it’s to help pay medical bills or finance a vacation, that extra cash can make your life a lot easier in the future.

If you start investing early and can put away $250 each month in an exchange-traded fund (ETF), it can help you build a large nest egg to live on later and use to generate 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 a large balance sheet

Whether you’re investing a large lump sum today or putting money away each month, an ETF can make the investment process much easier. Stock picking can be fun and challenging, but it can also be tedious and time consuming. For investors who prefer to keep things simple and not worry about the latest trends in technology or economic forecasts, putting money into an ETF can make the investment process much less daunting.

This is the place ETF Vanguard Growth Index Fund (VUG 0.23%) come in This ETF focuses on large-cap stocks with promising growth potential. In addition to big names in technology such as Nvidia and Microsoftthe fund will also give you exposure to top growth stocks such as Eli Lilly and Visawhich is among his top 10 holdings. For long-term investors, what’s also key is that the fund charges a tiny expense ratio of just 0.04%. These 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 about 300% including dividends. This represents a compound annual growth rate of 14.9%. The more you invest, the harder it will be to average such a high return given the inevitable down years the markets will experience along the way. But you can still be in a position to earn an excellent return by investing in the fund.

How much could your balance grow in 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 grow at a more modest rate of about 12% per year, that would mean if you invested $250 in it each month, your portfolio could grow to be worth more than $873,000 after 30 years . In comparison, if you were to stay 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 the balance starts to grow, so do the annual earnings. That’s why there’s a huge incentive to keep your money invested as long as you can afford to do so.

Turning that balance into a steady stream of dividend income

If you’ve built a portfolio worth about $873,000, then you’d want to target another fund that pays a return of about 4%. By doing this, you can expect to generate $35,000 in annual dividends. You can try to target higher yielding investments to try to accumulate even more dividend income, but that may involve taking on more risk along the way. After building such a large nest, the last thing you want to do is put it at risk by being a little too greedy.

However, by aiming for around 4%, you can find a good balance between high dividends and safety that won’t put your portfolio at risk. The SPDR Portfolio S&P 500 High Dividend ETF It currently offers investors a fairly high-yielding option, as it pays just under 4.1% at the moment. But there are other ETFs that can also provide good and diverse income options to consider.

Returns are not a guarantee, but the strategy is a solid one

Whether you end up getting an average return of 12%, or 13%, or 11%, it’s impossible to predict when you’re looking at a 30-year period. But investing in the stock market and focusing on growth stocks is a solid strategy for growing your savings over the long term. In the end, you’ll probably be much better off doing this than just putting the money in the bank.