If you have an extra $50,000 per year in retirement, you can worry less about whether you’ll have enough saved by the time you stop working. And it’s possible to get there, even if you don’t have a large sum to invest now. But you’ll need time.
If you have 30 years to go before retirement, I can show you how to turn a recurring $300 monthly investment into reasonably safe exchange-traded funds (ETFs) that produce $50,000 in dividend income annually.
Start with growth and then focus on dividends
You can’t generate a large amount of dividends without first building a large portfolio. If your goal is to earn $50,000 in annual dividends, you’ll want to aim for a portfolio worth over $1 million, which means you’ll need to earn a yield of around 5% to earn that level of dividend income.
But to be conservative, let’s aim for $1.3 million, which would mean you could earn $50,000 in dividends at 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 large payout.
Growing your portfolio to $1.3 million may seem daunting unless you focus on growth investments first. If you have 30 years of investing left, that won’t necessarily derail your overall trajectory, even if there are a few bad years when markets don’t do well and growth stocks struggle. Over the long term, quality growth stocks will typically appreciate in value.
However, some growth stocks are riskier than others. One way to reduce your overall risk is to hold ETFs instead of individual stocks. With ETFs, you can own dozens or even hundreds of stocks through a single investment. That reduces your overall risk and you can still generate great long-term returns.
Two examples of top growth funds you can invest in are the Invesco QQQ Confidence (NASDAQ: QQQ)which ranks the top 100 non-financial stocks on the Nasdaq exchange, and the Technology Select Sector SPDR Fund (NYSE: XLK)which introduces you to the technology sector of the S&P 500. Both funds can be a good option to invest money in monthly. You may even want to invest in both.
Over the past 10 years, the Technology Select fund has generated a total return (including dividends) of more than 520%, which is higher than the Invesco Fund’s 415% gain over the same period. Tech stocks have performed exceptionally well in recent years, but that could change in the future. Therefore, it could be a good move to put money into both investments.
But even with the Invesco Trust, you would still have gotten a compound annual growth rate (CAGR) of 17.8% over that period, which is an excellent return. By comparison, the Tech Select fund has an average CAGR of just over 20%. Both have proven to be excellent investments.
A high annual return can shorten the time you have to stay invested
Assuming you can average an annual return of 17% or better, that's optimistic over a 30-year period and would certainly be a best-case scenario. Below is a table showing 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 reach $1.3 million over a 30-year period, you would need an average annual return of about 13%. While a slightly better return could accelerate your portfolio growth, you would still likely need 30 years of investing to reach $1 million or more, unless you can invest more than $300 per month.
Once you have a balance of $1.3 million or thereabouts, you can invest in many dividend-focused ETFs, such as the SPDR Portfolio S&P 500 High Dividend ETFwhere the yield today is 4.3%. At that rate, a $1.3 million portfolio would generate about $56,000 per year in annual dividends. However, there are many other dividend funds that can also offer you high payouts. The key is to build that balance, because that opens up a lot of 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 (like the Invesco Fund or the Technology Select Sector ETF) can not only simplify your investment strategy, but also keep your risk low and set you on a path to generating great returns over the years. And if you can do that, generating big dividend income won’t be so hard toward retirement because you’ll have a big balance to use to your advantage.
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How to Generate More Than $50,000 in Annual Dividends by the Time You Retire was originally published by The Motley Fool
