1 Vanguard Index Fund Could Turn $500 a Month into a $968,400 Portfolio Paying $16,000 in Annual Dividend Income

Median annual earnings for full-time workers ages 25 to 34 were $57,200 in the second quarter, according to the Bureau of Labor Statistics. That means after-tax earnings would be about $43,800 at worst. Financial planners generally recommend saving 20% ​​of your after-tax earnings for retirement, which would be $8,760 per year or $730 per month for the average earner.

Even a percentage of that figure invested wisely could grow into a sizable portfolio given enough time. For example, history says that $500 is invested monthly in ETF Vanguard Dividend Appreciation (VIG 0.69%) it would be worth about $968,400 after three decades. The portfolio would initially generate approximately $16,000 per year in dividend income.

However, the underlying investment would continue to grow even without further contributions, so the dividend payout could be even higher until retirement, depending on when it occurs. For example, the portfolio would reach $1.2 million after three more years, at which point it would generate an annual passive income of about $19,800.

Here are the important details.

The Vanguard Dividend Appreciation ETF provides diversified exposure to financially stable companies

The Vanguard Dividend Appreciation ETF tracks US companies that have consistently increased their dividends for at least 10 years. Excludes dividend payers with yields in the top 25% to avoid companies with unsustainable payouts or limited growth prospects.

The fund includes 337 national companies, comprising value stocks and growth stocks, with an average market capitalization of $197 billion. The dividend yield is currently 1.65%. The top 10 holdings are listed below by weight:

1. Apple: 4.6%
2. Broadcom: 3.8%
3. Microsoft: 3.7%
4. JPMorgan Chase: 3.5%
5. UnitedHealth Group: 2.9%
6. ExxonMobil: 2.9%
7. Visa: 2.2%
8. Procter & Gamble: 2.2%
9. Johnson & Johnson: 2.2%
10. MasterCard: 2.2%

The Vanguard Dividend Appreciation ETF allows investors to spread money across a group of companies with the financial stability needed to not only pay a regular dividend, but also to increase the payout consistently. It carries a below-average 0.06% expense ratio, meaning annual fees on a $10,000 portfolio will total just $6.

How to turn $500 a month into $16,000 in annual dividend income

The Vanguard Dividend Appreciation ETF has returned 473% since its inception in 2006, assuming dividends are reinvested, which is equivalent to 9.9% annually. At that rate, $500 invested monthly in the ETF would be worth $95,100 in a decade, $339,700 in two decades, and $968,400 in three decades.

As mentioned, the Vanguard ETF currently pays a dividend yield of 1.65%, which is slightly below the 10-year average of 1.9%. But I will use the lower figure to ensure a conservative estimate. To that end, if dividends are no longer reinvested after three decades, the $968,400 portfolio will generate dividend income of about $16,000 per year.

Meanwhile, the core investment will continue to grow even without other contributions. For example, when dividends are excluded, the Vanguard ETF has gained 7.6% annually since inception. At that rate, the $968,400 portfolio would be worth $1.2 million after three more years, and that amount would generate annual dividend income of about $19,800.

Importantly, the scenario I just described involved saving $500 per month. But the median worker would need to save about $730 a month, which means we’re still $230 short. This money (and additional capital) could be invested in individual stocks as long as the investor does the necessary research. Alternatively, the money could be invested in an S&P 500 index fund, which provides diversified exposure to the most influential US stocks.