1 Vanguard Index Fund Could Turn $425 Per Month Into a $807,700 Portfolio That Pays $13,700 in Annual Dividend Income

Key Points

• Young adults with median earnings should save about $740 per month, but even a portion of that sum invested monthly could grow into a large portfolio that pays $13,700 in annual dividends by retirement.

• The Vanguard Dividend Appreciation ETF measures the performance of more than 300 U.S. stocks that have consistently raised their dividend payments each year for at least a decade.

• The Vanguard Dividend Appreciation ETF has returned 9.8% annually since its inception in 2006, and the fund currently pays a dividend yield of 1.7%.

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The median annual income for full-time workers aged 25 to 34 was $58,500 during the first quarter, according to the Labor Department. That means after-tax earnings would be about $44,300 in the worst-case scenario. Financial planners typically recommend saving 20% of after-tax income for retirement, which would be about $8,860 per year (or $740 per month) for the median worker.

Even a portion of that figure invested wisely could compound into a sizable portfolio with sufficient time. For instance, history suggests $425 per month in the Vanguard Dividend Appreciation ETF (NYSEMKT: VIG) could be worth about $807,700 after three decades. And the portfolio would initially generate about $13,700 per year in passive income -- but that figure could rise even higher with more time.

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Vanguard Dividend Appreciation ETF provides exposure to hundreds of financially strong U.S. stocks

The Vanguard Dividend Appreciation ETF tracks the S&P U.S. Dividend Growers Index, which itself measures the performance of 337 U.S. stocks that have consistently raised their dividends each year for at least 10 years. It excludes companies with dividend yields in the top 25% to avoid stocks with unsustainable payments and minimal growth prospects.

The Vanguard Dividend Appreciation ETF pays a dividend yield of 1.7% as of July 17, and half its assets are invested in companies with a market value exceeding $225 billion. The fund is most heavily weighted toward the information technology and financial sectors.

Here are the top 10 holdings:

1. Broadcom: 5.6%
2. Microsoft: 4.8%
3. JPMorgan Chase: 3.9%
4. Apple: 3.3%
5. Eli Lilly: 3%
6. Visa: 2.8%
7. ExxonMobil: 2.3%
8. Mastercard: 2.2%
9. Costco Wholesale: 2.1%
10. Walmart: 2%

In short, the Vanguard Dividend Appreciation ETF is essentially a ready-made portfolio filled with companies that have the financial strength to not only pay a dividend, but also to raise the payout consistently. The fund has an expense ratio of 0.05%, meaning shareholders will pay just $5 per year on every $10,000 invested.

The Vanguard Dividend Appreciation ETF could turn $425 per month into $13,700 in annual dividend income

Assuming dividends were reinvested, the Vanguard Dividend Appreciation ETF has returned 502% since it was created in 2006, which is equivalent to 9.8% annually. At that pace, $425 invested monthly in the fund would be worth about $807,700 after three decades.

As mentioned, the Vanguard ETF currently pays a dividend yield of 1.7%, which is slightly lower than the 10-year average of 1.9%. I will use the current payout to keep my estimate conservative. So, if shareholders stop reinvesting dividends after 30 years, the $807,700 portfolio will generate about $13,700 per year in dividend income.

Meanwhile, the underlying investment will continue to grow without further contributions. For instance, excluding dividends, the Vanguard Dividend Appreciation ETF has returned 310% since its inception, which is equivalent to 7.6% annually. At that rate, the $807,700 portfolio would be worth $1 million in another three years, and that sum would generate about $17,000 in annual dividend income.

Here's the big picture: The scenario I've described involves saving $425 per month. But the median worker aged 25 to 34 should be saving about $740 per month, which means we have yet to account for $315 of that total. That money (and any additional capital) could be invested in individual stocks, provided the investor is comfortable doing the requisite research. Alternatively, it could be invested in an S&P 500 index fund, which provides exposure to the most influential U.S. stocks.

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JPMorgan Chase is an advertising partner of Motley Fool Money. Trevor Jennewine has positions in Mastercard and Visa. The Motley Fool has positions in and recommends Apple, Costco Wholesale, JPMorgan Chase, Mastercard, Microsoft, Vanguard Dividend Appreciation ETF, Visa, and Walmart. The Motley Fool recommends Broadcom and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.