This Vanguard Index Fund Could Turn $500 Per Month Into a $1 Million Portfolio That Pays $15,000 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 $15,000 in annual dividends by retirement.
The Vanguard S&P 500 ETF includes 500 large stocks that cover 80% of domestic equities and over 50% of global equities by market value.
The Vanguard S&P ETF returned 10.3% annually over the last 30 years, and it paid an average dividend of 1.5% over the last decade.
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The median annual income for full-time workers aged 25 to 34 was $60,320 in the second quarter, according to the Bureau of Labor Statistics. That means after-tax earnings would be about $45,900 in the worst-case scenario. Financial experts usually recommend saving 20% of after-tax income for retirement, which would be $9,180 per year (or about $765 per month) for the median worker.
Even a portion of that figure invested wisely could build a substantial portfolio over time. For instance, history says $500 per month in the Vanguard S&P 500 ETF (NYSEMKT:VOO) could be worth about $1 million after three decades. And the portfolio would pay about $15,000 per year in dividends.
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The Vanguard S&P 500 ETF tracks many of the most influential stocks in the world
The Vanguard S&P 500 ETF measures the performance of the S&P 500 (SNPINDEX:^GSPC), which covers more than 80% of U.S. equities and about 50% of global equities by market value. In other words, the index fund offers exposure to many of the most influential companies in the world. Listed below are the top 10 positions in the Vanguard S&P 500 ETF:
- Nvidia: 8.1%
- Apple: 7%
- Microsoft: 5.7%
- Alphabet: 5.4%
- Amazon: 3.8%
- Broadcom: 2.7%
- Meta Platforms: 1.9%
- Micron Technology: 1.6%
- Tesla: 1.6%
- JPMorgan Chase: 1.4%
Prior to his retirement, Warren Buffett regularly advised individual investors to keep a large portion of their portfolios in an S&P 500 index fund because beating the benchmark is hard, even for professional money managers.
"The goal of the non-professional should not be to pick winners," Buffett wrote in 2014. Instead, he said individual investors should "own a cross-section of businesses that in aggregate are bound to do well. A low-cost S&P 500 index fund will achieve this goal."
In the last 15 years, less than 10% of large-cap funds outperformed the S&P 500, according to S&P Global. That means most professional fund managers would have been better off buying an S&P 500 index fund rather than picking individual stocks.
Most fund managers also charge exorbitant fees. But the Vanguard S&P 500 ETF has a very low expense ratio of 0.03%, meaning investors will pay just $3 per year on every $10,000 invested.
How the Vanguard S&P 500 ETF could turn $500 per month into a $1 million portfolio that pays $15,000 in annual dividends
The S&P 500 returned 1,820% over the last three decades, which is equivalent to 10.3% annually. That period encompasses such a broad range of market environments -- three U.S. recessions and 16 stock market corrections, including four bear markets -- that investors can reasonably anticipate similar returns in the future.
In that scenario, $500 invested monthly (about $115 weekly) in the Vanguard S&P 500 ETF would be worth $97,000 in one decade, $355,000 in two decades, and just over $1 million in three decades. And that total could be even higher with larger savings. For instance, $650 invested monthly (about $150 weekly) would be worth $1.3 million in three decades.
Those numbers assume dividends are reinvested. But shareholders could stop reinvesting dividends after 30 years to collect passive income. The Vanguard S&P 500 ETF had an average dividend yield of 1.5% over the last decade. At that rate, a $1 million portfolio would pay $15,000 in annual dividend income.
Here's the big picture: The S&P 500 has consistently created wealth over long periods, and the Vanguard S&P 500 ETF is a good way to get exposure to that index. However, investors need not choose between individual stocks and index funds. It's perfectly valid to own both. That strategy ensures a percentage of your portfolio will track the U.S. stock market, but it also leaves room for outperformance if your individual stocks beat the market.
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JPMorgan Chase is an advertising partner of Motley Fool Money. Trevor Jennewine has positions in Amazon, Nvidia, Tesla, and Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Broadcom, JPMorgan Chase, Meta Platforms, Micron Technology, Microsoft, Nvidia, S&P Global, Tesla, and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
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