The median annual earnings for full-time workers ages 25 to 34 was $58,500 during the first quarter, according to the Labor Department. So, after-tax earnings would be about $44,000 in the worst-case scenario. Financial planners generally recommend saving 20% of after-tax earnings for retirement.
That means the median worker ages 25 to 34 should be saving approximately $8,800 per year, which is about $730 per month. Even a percentage of that figure invested wisely could grow into a sizable sum by retirement.
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For instance, $500 added monthly to the Vanguard Dividend Appreciation ETF (NYSEMKT: VIG) would be worth $911,700 after three decades, and the portfolio would initially pay about $16,900 per year in dividend income. Read on to learn more.
The Vanguard Dividend Appreciation ETF tracks companies that regularly raise their dividends
The Vanguard Dividend Appreciation ETF (exchange-traded fund) follows the S&P U.S. Dividend Growers Index, which measures the performance of domestic companies that have consistently raised their dividends for at least 10 consecutive years. It also excludes dividend payers with yields in the top 25% to avoid companies with unsustainable payouts or limited growth prospects.
The Vanguard ETF includes 338 U.S. companies with a median market value of $224 billion. The dividend yield is currently 1.82%, easily topping the 1.27% yield on the S&P 500. The 10 largest holdings in the index fund are listed by weight below:
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Broadcom: 4.2%
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Microsoft: 4.1%
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Apple: 3.7%
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Eli Lilly: 3.7%
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JPMorgan: 3.6%
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Visa: 2.9%
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ExxonMobil: 2.4%
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Mastercard: 2.3%
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Costco Wholesale: 2.3%
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Walmart: 2.2%
Put simply, the Vanguard Dividend Appreciation ETF lets investors spread money across a diversified group of competitively advantaged businesses with the financial stability required to not only pay a regular dividend, but also raise that dividend consistently.
The last item of consequence is the expense ratio. The index fund has a reasonably cheap expensive ratio of 0.05%, which means shareholders will pay just $5 per year on every $10,000 invested in the fund. The average expense ratio on similar funds from other issuers is 0.75%, according to Vanguard.
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How the Vanguard Dividend Appreciation ETF could turn $500 per month into $16,900 in annual dividend income
The Vanguard Dividend Appreciation ETF has returned 471% since its inception in 2006, assuming dividends were reinvested. That is equivalent to 9.58% annually. At that pace, $500 invested monthly would be worth $93,700 in one decade, $327,600 in two decades, and $911,700 in three decades.
The Vanguard Dividend Appreciation ETF has paid an average dividend yield of 1.86% since its inception. At that rate, the $911,700 portfolio would pay a little more than $16,900 in annual dividend income. And that figure would keep increasing if the principal remained invested.
For instance, excluding reinvested dividends, the Vanguard Dividend Appreciation ETF has returned 7.3% annually since its inception. At that rate, the $911,700 portfolio would approach $1.3 million after five more years, and that sum would generate about $24,100 in annual dividend income.
Here is the big picture: By saving $500 per month — about two-thirds of what someone with annual income of $58,500 should be saving — young adults can accumulate $911,700 over three decades, and that sum will pay approximately $16,900 in annual dividend income. Importantly, that strategy also leaves about $230 per month to invest in individual stocks or other index funds. That means they could have much more than $911,700 by retirement.
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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.
