For many people, a single source of retirement income may not be enough to live the life they envision in retirement.
Luckily, with intentional investing and consistency, you can put yourself in a position to receive thousands monthly in dividend income. Here are three steps to take.
Image source: Getty Images.
1. Focus on a dividend-paying ETF
To set yourself up to receive worthwhile dividend payouts in retirement, you should make a dividend-focused exchange-traded fund (ETF) a key player in your investment portfolio. While many non-dividend-focused ETFs pay out dividends, ETFs focused on companies that have consistently paid out (and increased) dividends can be more lucrative for those seeking dividend income.
There is no universally accepted dividend yield that's considered "good," but as a baseline, investors focused on dividends should look for ETFs and companies that, at minimum, have a 2.5% yield. The SPDR S&P Dividend ETF (SDY -0.58%) tracks the S&P High Yield Dividend Aristocrats Index and consists of companies that have increased their dividend payout for at least 20 consecutive years. With a 2.75% dividend yield, it can provide decent payouts as your total investment grows.
Let's assume you accumulated $1 million worth of SPDR S&P Dividend ETF shares, which is very possible, given its historical returns of more than 9% annually since its inception. With $1 million invested, a 2.74% dividend yield would pay out $27,400 annually.
Here are various annual dividend payments at different account totals.
| Account Total | Annual Dividend Payouts |
|---|---|
| $1 million | $27,400 |
| $1.5 million | $41,100 |
| $2 million | $54,800 |
Data source: Calculations by author.
At those annual dividend earnings, you can expect to receive monthly payouts of roughly $2,200, $3,425, and $4,500, respectively.
2. Use dollar-cost averaging
Getting to the account value needed to produce thousands monthly in dividends won't happen overnight; you'll likely need time and consistency on your side. One of the best ways to accomplish this is by using dollar-cost averaging, which involves making consistent investments at regular intervals, regardless of an asset's value at the time. Think 401(k) plans: Each paycheck, you make contributions to your plan and it's invested, no matter how expensive or cheap your selections are at the time.
You can choose to break down your investments weekly, monthly, bimonthly, quarterly, or however else you see fit. What matters most is that you're consistent, making the investments regularly.
Even if you take away the 2.74% dividend yield of the SPDR S&P Dividend ETF and focus on the 9% it historically returns annually, here's how much you would have approximately accumulated at different monthly contributions.
| Monthly Contribution | Annual Return | Expense Ratio | Account Total After 30 Years |
|---|---|---|---|
| $750 | 9% | 0.35% | $1.15 million |
| $1,000 | 9% | 0.35% | $1.53 million |
| $1,500 | 9% | 0.35% | $2.3 million |
Data source: Calculations by author.
If you're able to utilize dollar-cost averaging and get to those account totals, you can expect to receive thousands in monthly dividend payouts. Add in the compounding effect of the dividend yield, and the total grows even further.
3. Make Roth IRA contributions
When deciding whether to contribute to a Roth IRA or traditional IRA, consider when you pay taxes. With a traditional IRA, there's a chance you can deduct your contributions from your taxable income, so you receive your tax break up front. With a Roth IRA, you contribute after-tax money, and in turn, your investments get to grow and compound tax-free.
If you made the above investments in a traditional IRA, you'd owe taxes on any dividends that you receive in retirement. If you made the investments in a Roth IRA, any dividend payouts would be tax-free, potentially saving you thousands yearly. There's an income limit to be eligible to contribute to a Roth IRA, so it would do you well to take advantage of it while you may be eligible.
