Here’s How You Can Generate an Extra $10,000 in Dividends per Year in Retirement | The Motley Fool

Having an extra $10,000 per year can make the difference between a comfortable retirement and a stressful one. That extra cash can help you to stay on top of bills or perhaps even fund a vacation. Generating dividend income can be a great way to supplement your retirement earnings and make you less dependent on other sources of cash.

Below, I’ll show you how investing in fairly safe exchange-traded funds (ETFs) can pave the way for a much more comfortable retirement.

Grow your savings first, then focus on dividends

To generate $10,000 in dividends per year, you’ll need to have around $250,000 in your portfolio. With that amount of money, you could collect a 4% yield from an ETF or multiple investments, and that would be enough to provide you with $10,000 per year in dividends. While you could target higher-yielding investments, which would require less money, those options often come with more risk.

The key is to first focus on growing your portfolio to that large of a value, and then putting that money into a dividend-focused ETF such as the Vanguard International High Dividend Yield Index, which pays close to 5% right now. A diversified fund such as that can minimize your overall risk while providing you with a an above-average yield — the S&P 500 average is just 1.4%.

To get to $250,000, you can first invest in a broad ETF such as the Vanguard S&P 500 ETF (VOO 0.87%). It tracks the S&P 500 and is a great way to achieve significant long-term returns. It also carries with it a minuscule 0.03% expense ratio, which means fees won’t eat up a big chunk of your profits. Over the past decade, the fund has generated returns of around 180% for investors.

How much do you need to invest today?

The earlier you start investing, the less you will need to set aside today to get to $250,000. Assuming you achieve annual returns of around 10%, which is the S&P 500’s long-run average, this is how much you would need to invest today, based on the number of investing years you have left.

Calculations by author.

If you have 40 investing years left before you plan to retire, you would need to invest approximately $5,524 into the Vanguard S&P 500 ETF for it to eventually grow to $250,000. In this example, the assumption is that you simply leave the money in the fund and allow it to grow over time. If, however, you don’t have enough to meet the above targets, it’s possible to make up for the shortfall by investing more later on.

Regardless of what the market is doing, it’s a good idea to remain invested

The S&P 500 has been hitting new records this year, and there are concerns that perhaps the market is getting a bit too hot. But as long as you don’t need to take out your money anytime soon, it’s generally a good idea to remain invested in stocks rather than trying to time the market, which can be risky and result in you missing out on gains.

There will inevitably be good years as well as bad ones, but in the long run, you’re likely to achieve some significant gains in your portfolio, even if all you do is track the S&P 500. By focusing on growth first and then transitioning to dividend stocks during your retirement years, you can make the most of your money and set yourself up for a path where you generate significant dividend income later on in life.