Want thousands in monthly retirement income? Focus on dividends | personal finance

(Stefon Walters)

Trying to decide how much money you need to save for retirement can be stressful for many people. After all, there’s no hard and fast answer to how much someone will need; different lifestyles require different amounts.

To really be sure that you can live financially comfortably in retirement, you need to use all available resources, including the various retirement accounts, including a 401(k) or IRA.

An underrated source of retirement income is dividends. With intentional investment, time, and patience, you can put yourself in a position to receive thousands in monthly dividend payments.

Image source: Getty Images.

Take the time to build your portfolio

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One of the few ways to build a good dividend portfolio is to accumulate enough dividend-paying assets to make the payouts worthwhile. Many ETFs pay dividends as a by-product of the companies within the fund (take the Vanguard S&P 500 ETF (NYSEMKT: VOO)with a dividend yield of 1.47%, for example).

However, there are dividend-focused ETFs that contain companies that not only pay high dividends but have also been increasing their dividend payouts for quite some time. With a dividend yield of 2.83%, the Vanguard High Dividend Yield ETF (NYSEMKT: VYM) It’s one of those funds.

You probably don’t have hundreds of thousands of dollars that you can invest in a lump sum in one investment, but with dollar cost averaging and patience, you can build up a sizable amount over time. Even if you strip out dividend yields, with a modest 8% annual return, you could amass more than $1.1 million by investing $10,000 annually for 30 years. In those 30 years, he would have personally contributed $300,000, but his account would be more than $800,000 of that.

As you build your dividend portfolio, one of the best things you can do is sign up for a dividend reinvestment plan (DRIP). DRIPs take the dividend payments you receive and automatically use them to buy more shares of the respective company or fund. Along with gains in stock prices, DRIPs add to total return and increase the compounding effect.

Earn rewards in retirement

Once you’ve spent enough time building your holdings in dividend-paying assets, it’s time to reap the rewards in retirement. For example, if you managed to accumulate $1 million in the Vanguard High Dividend Yield ETF at its current dividend yield, you would receive $28,300 annually.

Here are the annual dividend payments at different account amounts.

bill total Annual Dividend Payments
$1 million $28,300
$1.5 million $42,450
$2 million $56,600

Data source: Author’s calculations.

With those account totals, you could be receiving more than $2,300, $3,500, and $4,700 per month, respectively. And the dividend yield doesn’t have to be that high to produce notable returns; Any dividend yield above 2.5% is considered good and can lead to considerable income in retirement.

Get your dividend payments tax-free

To really take advantage of dividend-paying assets, consider buying them in a Roth IRA instead of a regular brokerage account. When you receive dividend payments into a brokerage account, that amount is taxable (either your capital gains rate or your regular income rate). Unlike a brokerage account, investments in a Roth IRA can grow and compound tax-free. Not having to pay any taxes on dividend payments in retirement can easily save you thousands of dollars over time.

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Stefon Walters has positions in the Vanguard S&P 500 ETF. The Motley Fool has positions and recommends the Vanguard High Dividend Yield ETF and the Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.

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