Two Vanguard index funds could turn $400 a month into $16,800 in annual dividend income by retirement
He S&P 500 Index (SNP INDEX: ^GSPC) It outperformed virtually every other asset class over the past decade, including bonds, international stocks, precious metals and real estate. The index also outperformed more than 85% of large-cap funds, meaning S&P 500 index funds often produce better returns than professional money managers.
Investors can use that information to build a portfolio that generates large amounts of passive income. For example, $400 invested monthly in an S&P 500 index fund could grow to $789,500 over three decades. That sum could be reinvested (minus capital gains tax) in an index fund with a high dividend yield to generate $16,800 in passive income annually.
Here are the important details.
Step 1: Invest $400 per month in the Vanguard S&P 500 ETF
He Vanguard S&P 500 ETF (NYSEMKT:FLIGHT) is a low-cost S&P 500 index fund. It measures the performance of 500 U.S. companies covering approximately 80% of domestic stocks and over 50% of global stocks by market capitalization. In other words, it allows investors to spread capital across many of the world’s most influential companies.
The five largest holdings in the Vanguard S&P 500 ETF are listed by weight below:
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Apple: 6.9%
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Microsoft: 6.5%
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Nvidia: 6.2%
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Alphabet: 3.7%
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Amazon: 3.4%
The S&P 500 has returned 2,000% over the past three decades, which is 10.6% annually. I’ll round down to 10% to introduce a margin of safety. At that rate of return, $400 invested monthly in the Vanguard S&P 500 ETF would be worth $789,500 after three decades. Investors can then sell the index fund and reinvest the proceeds in another fund.
Depending on the type of account, investors may have to pay capital gains tax when they sell the Vanguard S&P 500 ETF. Federal taxes on that amount would total about $100,000, but state taxes would vary. So I’ll round the total tax burden to $150,000, which leaves $639,500 to reinvest in another index fund with a high dividend yield.
Step 2: Invest $639,500 in the Vanguard High Dividend Yield ETF
He Vanguard High Dividend Yield ETF (NYSE: VYM) measures the performance of 550 U.S. companies that are expected to pay above-average dividends. While the Vanguard S&P 500 ETF includes value actions and growth stocks, this index fund leans heavily toward value stocks. The top five holdings are listed by weight below:
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Broadcom: 4.2%
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JPMorgan Chase: 3.6%
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ExxonMobil: 3%
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Procter & Gamble: 23%
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Johnson and Johnson: 2.2%
The Vanguard High Dividend Yield ETF currently pays a dividend yield of 2.63%. At that rate, the $639,500 in the section above would generate about $16,800 in annual dividend income. And the payout should increase over time.
The Vanguard High Dividend Yield ETF has returned 88% over the past decade. At that rate, the total amount invested in the index fund would reach $1.2 million in 10 years, and that total would generate about $31,600 in annual dividend income.
Most people should save more than $400 per month
According to the Census Bureau, the average American worker earned $69,240 in net-tax income in 2023. Financial planners generally recommend saving 20% of net-tax income for retirement. That means the average worker should save $13,848 per year, or $1,154 per month.
In that context, $400 a month is a reasonable goal for most people. It would also leave the average worker with $754 a month in additional savings, which could be invested in stocks or other index funds. Either way, the end result should be a sizable nest egg that pays five figures of annual passive income in retirement.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Trevor Jennewine The Motley Fool has positions in Amazon, Nvidia, and Vanguard S&P 500 ETFs. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, JPMorgan Chase, Microsoft, Nvidia, Vanguard S&P 500 ETFs, and Vanguard Whitehall Funds-Vanguard High Dividend Yield ETFs. The Motley Fool recommends Broadcom and Johnson & Johnson and recommends the following options: January 2026 $395 call options on Microsoft and January 2026 $405 call options on Microsoft. The Motley Fool has a Disclosure Policy.
Two Vanguard index funds could turn $400 a month into $16,800 in annual dividend income by retirement Originally published by The Motley Fool
