How Investing $500 Monthly in This Vanguard ETF Could Create Nearly $5,700 in Annual Dividend Income

Key Points

• The Vanguard Energy ETF currently offers the highest dividend yield of all Vanguard ETFs.

• Investing $500 monthly in this ETF over 30 years could easily generate nearly $5,700 in annual dividend income at the end of the period.

• The actual dividend income received could vary, but the chances are good that the amount could be higher than $5,700.

• 10 stocks we like better than Vanguard World Fund - Vanguard Energy ETF ›

Mick Jagger and the Rolling Stones had it right when they sang, "Time Is on My Side." If you're looking to build up solid dividend income, time is on your side, too.

Time is only one of the necessary ingredients, though. You'll also need money to invest regularly. And you'll need a good investment vehicle that pays attractive dividends. I think the Vanguard Energy ETF (NYSEMKT: VDE) fits the bill nicely. Here's how investing $500 monthly in this Vanguard ETF could create nearly $5,700 in annual dividend income.

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Why go with the Vanguard Energy ETF?

Vanguard markets 97 exchange-traded funds (ETFs). Why go with the Vanguard Energy ETF as a key component of your dividend income strategy? The short answer is that this ETF's dividend yield of 3.16% is currently the highest in the Vanguard family.

Granted, you can get higher yields from other Vanguard funds. However, they're all bond funds that pay interest rather than dividends. We're focusing solely on dividend income.

The Vanguard Energy ETF owns 116 energy stocks, most of which pay dividends. Its top holdings include dividend stars such as ExxonMobil, Chevron, ConocoPhillips, The Williams Companies, and EOG Resources.

Dividends are typically a core component of the value proposition that energy stocks offer to investors. It shouldn't be surprising, therefore, that the Vanguard Energy ETF pays a more attractive dividend yield than even the Vanguard High Dividend Yield ETF does.

Crunching the numbers

How can investing $500 per month in the Vanguard Energy ETF create nearly $5,700 in annual dividend income? The Rolling Stones had the answer: time.

Let's suppose that you invest $500 per month in this Vanguard ETF for 30 years. That's not too much of a stretch for many investors. If you start contributing money at age 30 and continue until you're 60, you'll achieve the goal.

At the end of the 30 years, your total amount invested will be $180,000. The math to reach this number is straightforward. Investing $500 per month, multiplied by 12 months per year, multiplied by 30 years equals $180,000.

If we assume that the Vanguard Energy ETF pays the same 3.16% dividend yield at the end of the period that it does today, your annual dividend income will be $5,688. That's not far below the $5,700 mentioned.

Your actual dividend income could vary (for better or worse)

Is it possible that your actual dividend income at the end of 30 years could be much lower than $5,700? Sure. If the Vanguard Energy ETF cuts its dividend payout significantly, your dividend income will be reduced. There's historical precedent for this. The oil price collapse that began in 2015 caused many energy companies in the ETF's portfolio to cut their dividends.

However, I think the odds are pretty good that you could receive dividend income that's higher than $5,700 if you invest $500 monthly in this Vanguard ETF for 30 years. That's especially likely if you reinvest the dividends you receive along the way. Using the dividends to buy more shares can boost your total dividend income quite a bit over time.

There's also a decent chance that the Vanguard Energy ETF will increase its dividend payout over the next three decades. Interestingly, even though the ETF slashed its dividend in 2015, its dividend has more than quadrupled since the fund's inception in September 2004. In addition, the Vanguard Energy ETF's current dividend almost exactly matches its average dividend since the ETF was launched. It's not at an unusually high level that might make a dividend cut likely.

VDE Dividend data by YCharts.

Keep in mind, too, that we're only talking about dividend income. Your income could be even greater if you decide to sell some shares every now and then at the end of the 30 years. And the amount of your investment could be much greater than the $180,000 used in our calculation. Time really can be on an investor's side.

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Keith Speights has positions in Chevron, ExxonMobil, and Williams Companies. The Motley Fool has positions in and recommends Chevron, EOG Resources, and Vanguard Whitehall Funds-Vanguard High Dividend Yield ETF. The Motley Fool has a disclosure policy.