1 High Yield ETF Could Turn $400 Per Month Into $50,000 in Annual Dividend Income

Building a large dividend portfolio doesn’t have to be complicated.

Building a portfolio of dividend stocks that can replace all or part of your salary is an important goal for many retirement savers.

There are several advantages to living exclusively on the dividends paid by your shares. You’ll likely receive a steadily increasing salary each year, and you’ll likely never have to sell your stock. This could allow you to leave a lot of money to your heirs. Plus, it can be incredibly tax efficient.

Building a portfolio that pays you $50,000 in annual dividends doesn’t have to be complicated. You don’t need to constantly buy and sell stocks or invest exclusively in risky securities, high yielding dividend stocks. You can create a dividend stream of over $50,000 per year simply by regularly investing $400 per month in a single ETF: Schwab US Dividend Stock ETF (SCHD 0.15%).

A fund focused on high-quality dividend payers

The Schwab US Dividend Equity ETF follows the Dow Jones US Dividend 100 hint. The stocks in the index have all paid dividends for at least 10 consecutive years and have balance sheets and cash flows to support those dividends. The committee focuses on eligible companies with the highest dividend yields and dividend growth rates. So, not only are these great dividend payers, but they are expected to remain so and increase their dividends in the future.

The main holdings of the Schwab US Dividend Equity ETF are:

1. Texas Instruments (2.6% dividend yield)
2. Amgen (2.9%)
3. Lockheed Martin (2.7%)
4. PepsiCo (3%)
5. Chevron (4%)
6. Pfizer (5.9%)
7. Coca-Cola (3.1%)
8. Verizon (6.7%)
9. United Parcel Service (4.4%)
10. black rock (2.5%)

The combination of high dividend yield stocks and stocks with good yield and high dividend growth potential produces a combined current dividend yield of 3.46%. As mentioned, the stocks included in the fund generally increase their dividends each year. Over the past five years, the fund’s total dividend distribution has grown at a compound annual growth rate of 11.8%. Although dividends will likely not grow at this rate every year, investors can expect dividend growth to exceed inflation most years, which is a good hedge against rising costs in the future.

How $400 a month could generate $50,000 in annual dividends

The Schwab US Dividend Equity ETF has produced an annualized total return of 12.83% since its inception in late 2011. Investors shouldn’t expect this type of return indefinitely, however. The fund has benefited from exceptionally strong market conditions since its inception. THE S&P500for reference, has returned an average of 14.6% since the inception of the Schwab US Dividend Equity ETF.

As such, a reasonable expectation for the fund going forward is slightly below the historical returns of the S&P 500. Longer-term dividend-focused funds have an annual return of around 8.5% when you include the dividends. This seems like a reasonable expected return. This translates to approximately 5% capital appreciation combined with its dividend.

If you regularly invest $400 in the Schwab ETF month after month and reinvest the dividend distributions, you will eventually build a large portfolio paying a significant amount of dividends each year. Here’s what your account balance would look like over time, based on stable monthly returns equal to 8.5% per year and the fund’s current dividend yield.

Year Expected value Theoretical dividends

Source of the table: author. Calculations by author.

If you can save and invest consistently for 40 years, $400 per month can turn into $51,340 in annual dividends based on the fund’s current performance. Plus, even when you start spending those dividends to cover living expenses instead of reinvesting them, you can expect your income stream to continue to grow each year as the fund’s shares increase their payouts.

There are, however, a few important things to note. First of all, the returns above are theoretical, based on an estimate of what you can reasonably expect from the fund in an average year. As any investor knows, the stock market does not rise in a straight line. The good news, however, is that large-cap companies value stocks held by the Schwab US Dividend Equity ETF generally fare better than average in down markets. As a result, total returns from year to year will be less volatile than those of other funds.

Another thing to consider is that dividend yields could decrease or increase in the future. Average returns have declined over time, and this decades-long trend may continue. If this is the case, the dividend stream will not be as strong.

Finally, long-term investors should consider whether $50,000 in dividend income 40 years from now will be enough for retirement. While that may seem like a lot today, inflation will slowly (or sometimes quickly) erode the purchasing power of that money. If you currently spend $50,000 a year on living expenses, $50,000 in the future probably won’t be enough to live on in 40 years, all else being equal.

However, if you regularly invest your extra money into the Schwab US Dividend Equity ETF each month, you will be sure to build a nice portfolio of stocks paying you a good amount of dividends each year.

Adam Levy has no position in any of the stocks mentioned. The Motley Fool holds positions and recommends Chevron, Pfizer and Texas Instruments. The Motley Fool recommends Amgen, Lockheed Martin, United Parcel Service and Verizon Communications. The Motley Fool has a disclosure policy.

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