How investing $500 per month in a Vanguard ETF could generate $50,000 in annual dividend income

Replacing your salary, or at least part of it, with a steady stream of dividends is a great retirement strategy.

Not only could you earn enough from your investments to live on, but you would likely never have to sell your holdings. This provides excellent protection against losses and an incredible inheritance to pass on to your heirs.

The good news is that $50,000 in annual dividends is within reach for many investors. Best of all, it doesn’t require risky investments in high yielding dividend stocks with an uncertain future. You can create a $50,000 dividend stream simply by regularly investing about $500 per month in a simple Vanguard ETF: the Vanguard High Dividend Yield ETF (NYSEMKT:VYM).

The only ETF you need to build a large dividend portfolio

The Vanguard High Dividend Yield ETF follows the FTSE High Dividend Yield Index. THE stock index includes stocks whose dividend yields are expected to be above average. This means that not only should stocks offer meaningful dividends now, but they should also be reasonably expected to continue to offer an above-average return.

The main holdings of the Vanguard High Dividend Yield ETF are:

1. Broadcom (1.53% dividend yield)

2. JPMorgan Chase (2.36%)

3. ExxonMobil (3.13%)

4. Johnson & Johnson (3.20%)

5. Home deposit (2.58%)

6. Procter & Gamble (2.58%)

7. Merck (2.44%)

8. AbbVie (3.70%)

9. Chevron (4.06%)

10. Walmart (1.37%)

As you can see, the fund’s biggest holdings don’t offer massive dividend yields. But they offer, for the most part, higher returns than S&P500the average dividend yield of 1.31%. In fact, the fund currently offers a yield of just 2.82%. It is important to note that the companies in the fund are expected to continue to maintain their dividend for a long time. As such, investors should expect a stable and growing income stream.

How $500 per month could generate $50,000 in annual dividends

The Vanguard High Dividend Yield ETF has historically produced a total compound annual return of 8.53% since inception. Although dividend stock yields can fluctuate for a variety of reasons, the historical performance since their inception in 2006 is a good estimate of what to expect.

If all you did was buy $500 worth of ETFs month after month and reinvest your dividends, you’d end up with a sizable portfolio. This is what your account balance would look like with stable monthly ETF returns based on its historical rate of return.

Data source: Author. Figures are based on $500 invested monthly in the Vanguard High Dividend Yield ETF and interest is calculated on a compound basis.

The story continues

If you can consistently invest $500 per month for 40 years, you’ll end up with a dividend income stream worth $52,731, based on the fund’s current yield. You can expect to receive this income stream every year. And if you haven’t touched your capital, you can expect it to continue to grow and pay out an even larger amount the following year.

There are several important caveats to consider. First, there is no guarantee that future returns will resemble past returns. Additionally, it is extremely unlikely that the fund will return the same amount to investors month after month. Market volatility guarantees that your final result will be somewhat different from the previous chart. Nonetheless, it is directionally accurate and presents reasonable expectations for investors.

Second, it’s unclear what dividend yields will look like in the future. Although the fund’s yield is currently 2.82%, this figure could increase or decrease over the coming decades.

Finally, inflation means that $50,000 will not have the same purchasing power in 40 years as it does today. If you currently spend $50,000 each year, aiming for $50,000 in annual dividends probably won’t be enough to live on in 40 years, all else being equal.

That said, the Vanguard High Dividend Yield ETF is one of the best options for building a solid portfolio of dividend stocks with virtually no effort.

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JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Adam Levy has no position in any of the stocks mentioned. The Motley Fool has positions and recommends Chevron, Home Depot, JPMorgan Chase, Merck, Vanguard Whitehall Funds-Vanguard High Dividend Yield ETF, and Walmart. The Motley Fool recommends Broadcom and Johnson & Johnson. The Motley Fool has a disclosure policy.

1 Simple Vanguard ETF Could Turn $500 Per Month Into $50,000 in Annual Dividend Income was originally published by The Motley Fool