According to the Bureau of Labor Statistics, the median annual income for full-time workers aged 25 to 34 stood at $59,000 during the fourth quarter. After accounting for taxes, this income would amount to approximately $45,000 under the worst-case scenario. Financial advisors frequently suggest that individuals save 20% of their after-tax income for retirement, which for the median worker in this age bracket equates to saving about $9,000 annually or $750 per month.
Investing even half of that amount wisely could potentially result in a significant portfolio over time. For example, a monthly investment of $375 in the Vanguard S&P 500 ETF (VOO) could grow to at least $592,100 after 30 years, after taxes and fees. This sum could then be reinvested in the Vanguard High Dividend Yield ETF (VYM) to potentially generate around $17,900 annually in dividend income.
For investment strategy, it is recommended to initially invest $375 per month in the Vanguard S&P 500 ETF over a 30-year period. The S&P 500 index, which tracks the performance of 500 large U.S. companies comprising about 80% of the domestic equity market, acts as a broad benchmark for the U.S. stock market. Vanguard’s ETF, tracking this index, includes major holdings such as Apple (7.2%), Nvidia (6.1%), Microsoft (5.9%), Amazon (3.9%), and Alphabet (3.6%).
Over the past three decades, the S&P 500 achieved a total return of 1,750%, with an annual compound rate of 10.2%, despite enduring four bear markets and three U.S. economic recessions. For future projections, an annual return rate of 10% is assumed to include a margin of safety. This would bring the projected value of a $375 monthly investment in the Vanguard S&P 500 ETF to $740,200 after 30 years, assuming all dividends are reinvested. Depending on account type and potential capital gains taxes, fees might reduce this amount by approximately 20%, resulting in around $592,100.
The next step would be to reinvest this amount in the Vanguard High Dividend Yield ETF, which tracks about 520 companies expected to pay above-average dividends and generally considered value stocks. The current dividend yield is 3.05%, with major holdings in Broadcom (4.9%), JPMorgan Chase (4%), ExxonMobil (2.7%), Walmart (2.3%), and Procter & Gamble (2.2%). Over the past decade, the ETF provided an average dividend yield of 3.03%, which could translate to generating over $17,900 in annual dividend income if the $592,100 is reinvested in this fund.
While the described strategy spans over 30 years, it is possible that the Vanguard High Dividend Yield ETF might not remain the ideal choice or may cease to exist in three decades. Investors should then consider alternative products offering substantial passive income, ensuring a balance between high dividend yields and stability from value stock portfolios, rather than choosing funds solely for their high yields.
This scenario involves market assumptions including potential modifications based on external factors. Key persons and organizations mentioned are linked to notable business entities, like Suzanne Frey with Alphabet and John Mackey with Amazon, which are associated with The Motley Fool’s board and partners. Furthermore, Trevor Jennewine, affiliated with The Motley Fool, holds positions in Amazon, Nvidia, and Vanguard S&P 500 ETF. The financial advisory also recommends positions in companies such as Alphabet, Amazon, Apple, JPMorgan Chase, Microsoft, Nvidia, and others, and provides disclosures concerning advertising partnerships and investment strategies.
