1 Vanguard Index Fund Could Turn $450 Per Month Into a $905,200 Portfolio That Pays $16,400 in Annual Dividend Income

Key Points

• Young adults with median earnings who save 20% of after-tax income can build a sizable portfolio that pays about $16,400 in annual dividends over 30 years.

• The Vanguard Dividend Appreciation ETF tracks about 330 U.S. stock that have increased their dividend payments annually for at least a decade.

• The Vanguard Dividend Appreciation ETF has returned 10.1% annually since its inception in 2006, and it paid an average dividend of 1.82% during that time.

• 10 stocks we like better than Vanguard Dividend Appreciation ETF ›

The median annual income for full-time workers aged 25 to 34 was $59,280 during the first quarter, according to the Labor Department. That means after-tax earnings would be about $45,100 in the worst-case scenario. Financial planners usually recommend saving 20% of after-tax income for retirement, which would be $9,020 per year (or about $750 per month) for the median worker.

Even a portion of that figure, invested wisely, could build a sizable portfolio over time. History says $450 per month in the Vanguard Dividend Appreciation ETF (NYSEMKT: VIG) could be worth about $905,200 after three decades. And the portfolio could initially generate about $16,400 in passive income per year.

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The Vanguard Dividend Appreciation ETF is a ready-made portfolio of financially stable companies

The Vanguard Dividend Appreciation ETF measures the performance of 331 U.S. stocks that have regularly raised their dividends each year for at least a decade. It excludes stocks with dividend yields in the top 25% to avoid companies with unsustainable payouts and minimal growth prospects.

The index fund currently yields 1.47%. It includes stocks from every market sector apart from real estate, but it’s most heavily weighted toward information technology (28%), financials (20%), and healthcare (17%). The top 10 holdings are listed below:

1. Broadcom: 5.4%
2. Apple: 4.5%
3. Microsoft: 4.2%
4. Eli Lilly: 3.8%
5. JPMorgan: 3.3%
6. ExxonMobil: 2.6%
7. Johnson & Johnson: 2.3%
8. Visa: 2.2%
9. Walmart: 2.2%
10. Cisco Systems: 2%

Investors can think of the Vanguard Dividend Appreciation ETF as a ready-made portfolio comprising hundreds of companies with the financial strength to not only pay dividends but also consistently raise the payout. The fund has an expense ratio of 0.04%, which means shareholders will pay $4 per year on every $10,000 invested. That is well below the average expense ratio of 0.72% among similar funds.

The Vanguard Dividend Appreciation ETF could turn $450 per month into $16,400 in annual dividend income

Since its creation in 2006, the Vanguard Dividend Appreciation ETF has returned 598% (if dividends were reinvested), equivalent to an annual return of 10.1%. At that pace, $450 invested monthly in the fund would be worth about $905,200 after three decades.

The Vanguard fund currently pays a dividend yield of 1.47%, but the historical average is 1.82%. Assuming the payout reverts to the average, a $905,200 portfolio would generate $16,400 per year in dividend income. And the underlying investment would keep growing even if you no longer add new capital or reinvest dividends.

Excluding dividends, the Vanguard Dividend Appreciation ETF has returned 310% since its inception, which is equivalent to 7.9% annually. At that rate, the $905,200 portfolio would be worth $1.3 million in another three years, and that sum would generate about $23.600 in annual dividend income.

Any additional money could be invested in individual stocks or an S&P 500 index fund

The strategy described in the previous sections involved saving $450 per month. But the median worker aged 25 to 34 should be saving about $750 per month. That means we have yet to account for $300. You could invest that money (and any additional cash) in individual stocks, especially artificial intelligence stocks, provided you are willing to do the necessary research.

Alternatively, the S&P 500 (SNPINDEX: ^GSPC) returned 10.3% annually over the last three decades, which makes an S&P 500 index fund like the Vanguard S&P 500 ETF an attractive option. Assuming the index matches its 30-year average, $300 invested monthly in an S&P 500 index fund would be worth $58,200 in one decade, $213,300 in two decades, and $626,800 in three decades.

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JPMorgan Chase is an advertising partner of Motley Fool Money. Trevor Jennewine has positions in Vanguard S&P 500 ETF and Visa. The Motley Fool has positions in and recommends Apple, Broadcom, Cisco Systems, Eli Lilly, JPMorgan Chase, Microsoft, Vanguard Dividend Appreciation ETF, Vanguard S&P 500 ETF, Visa, and Walmart. The Motley Fool recommends Johnson & Johnson. The Motley Fool has a disclosure policy.