Want Thousands in Monthly Retirement Income? Focus on Dividends

Trying to decide how much money you need to save for retirement can be stressful for many people. After all, there’s no concrete answer as to how much someone will need; different lifestyles require different amounts.

To really be sure you can live financially comfortably in retirement, you should utilize all resources available to you, including the various retirement accounts, including a 401(k) or IRAs.

One underrated source of retirement income is dividends. With intentional investing, time, and patience, you can put yourself in a position to receive thousands in monthly dividend payouts.

Image source: Getty Images.

Take the time to build up your portfolio

One of the few ways to achieve a good dividend portfolio is by accumulating enough dividend-paying assets to make the payouts worthwhile. Many ETFs pay out dividends as a by-product of the companies within the fund (take the Vanguard S&P 500 ETF (NYSEMKT: VOO), with a 1.47% dividend yield, for example).

However, there are dividend-focused ETFs that contain companies that not only pay high dividends but also have increased their dividend payouts for quite some time. With a 2.83% dividend yield, the Vanguard High Dividend Yield ETF (NYSEMKT: VYM) is one such fund.

You likely won’t have hundreds of thousands of dollars you can invest in a lump sum into an investment, but with dollar-cost averaging and patience, you can accumulate a sizable amount over time. Even if you take away dividend yields, with a modest 8% annual return, you could accumulate over $1.1 million by investing $10,000 annually for 30 years. In those 30 years, you would have personally contributed $300,000, yet your account would be more than $800,000 of that amount.

As you’re building up your dividend portfolio, one of the best things you can do is enroll in a dividend reinvestment plan (DRIP). DRIPs take the dividend payouts you receive and automatically use them to purchase more shares of the respective company or fund. Along with whatever gains in stock prices, DRIPs add to the total return and increase the compounding effect.

Get rewarded in retirement

Once you have spent enough time increasing your holdings in dividend-paying assets, it’s time to reap the rewards in retirement. For example, if you managed to accumulate $1 million in the Vanguard High Dividend Yield ETF at its current dividend yield, you would receive $28,300 annually.

Here are the annual dividend payouts at different account amounts.

Account Total
Annual Dividend Payouts
$1 million
$28,300
$1.5 million
$42,450
$2 million
$56,600

Data source: Calculations by author.

At those account totals, you could be receiving over $2,300, $3,500, and $4,700 per month, respectively. And the dividend yield doesn’t have to be that high to produce noticeable returns; any dividend yield over 2.5% is considered good and can produce sizable income in retirement.

Get your dividend payouts tax-free

To really take advantage of dividend-paying assets, consider buying them in a Roth IRA instead of a regular brokerage account. When you receive dividend payments in a brokerage account, that amount is subject to taxes (either your capital gains rate or regular income rate). Unlike a brokerage account, investments in a Roth IRA get to grow and compound tax-free. Not having to pay any taxes on dividend payouts in retirement can easily save you thousands of dollars over time.

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Stefon Walters has positions in Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Vanguard High Dividend Yield ETF and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.

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