1 Simple Vanguard ETF Could Convert $500 per Month Into $50,000 in Annual Dividend Income

Replacing your paycheck, or at least a portion 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’d probably never have to sell your holdings. This provides excellent protection against loss and an incredible legacy to pass on to your heirs.

The good news is that $50,000 in annual dividend income is well within reach for many investors. Better yet, there’s no need for risky investments in high-yield dividend stocks with an uncertain future. You can build a $50,000 dividend stream 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 suit FTSE High Dividend Yield Index. The stock index includes stocks for which an above-average dividend yield is forecast. This means that the stocks must not only offer meaningful dividends now, but there must also be a reasonable expectation that they will continue to offer above-average returns.

The largest holdings in 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 Depot (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 largest holdings don’t offer huge dividend yields. But for the most part they offer returns above that S&P 500The average dividend yield is 1.31%. In fact, the fund currently offers a yield of just 2.82%. It is important that the companies in the fund should continue to support their dividends for a long time. Therefore, investors should expect a steady and growing source of income.

How $500 per month could generate a $50,000 annual dividend

The Vanguard High Dividend Yield ETF has historically delivered an annual total return of 8.53% since its launch. While dividend stock returns can fluctuate for many reasons, the historical return since its inception in 2006 is a good estimate of what to expect.

If the only thing you ever did was buy $500 worth of ETFs month after month and reinvest your dividends, you would eventually end up with a sizable portfolio. This is what your account balance would look like if the ETF had stable monthly returns based on its historical return.

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

The story goes on

If you can invest $500 per month consistently for 40 years, you will receive $52,731 in dividend income based on the current fund yield. You can expect to receive this source of income every year. And if you leave your principle unchanged, you can expect it to continue to grow and pay out an even larger amount next year.

There are several important caveats to note. First, there is no guarantee that future returns will look like past returns. Additionally, it is extremely unlikely that the fund will return the same amount to investors month after month. The volatility in the market means that your final result will look slightly different than the previous table. Nonetheless, it is directional and represents a reasonable expectation for investors.

Second, it is impossible to predict what dividend yields will look like in the future. While the fund’s current yield is 2.82%, that number could rise or fall over the next few 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, earning a $50,000 annual dividend, all other things being equal, probably won’t be enough to live on in 40 years.

Still, 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 in 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 Annual Dividend Income was originally published by The Motley Fool