Here's How Investing $450 Per Month Could Generate More Than $30,000 in Annual Dividends

Dividend stocks often pay 5% or less. These days, with the S&P 500 climbing to record highs, the average stock in the index yields just 1.1%. Unless you’re already rich, that’s not going to generate much dividend income for you.

Instead, a better strategy is to invest in a top exchange-traded fund (ETF), such as the Schwab U.S. Dividend Equity ETF (SCHD +0.45%), and have it grow by reinvesting dividends. Then, as you’ve amassed a significant balance, you can stop reinvesting the dividend and simply collect it.

Here’s a closer look at how investing $450 per month in the ETF could enable you to collect over $30,000 in annual dividend income in the future.

Investing in the Schwab fund can be a great way to grow your balance in the long run

In order to generate a lot of dividend income, you need a substantial balance. This is where reinvesting the dividend income from the Schwab fund can be highly beneficial, helping boost your returns in the long run. Over the past 10 years, the Schwab fund has generated returns of around 135%, but with dividends reinvested, the total returns are about 225%. That averages out to a compounded annual growth rate of about 12.5%, which is higher than the S&P 500’s historical average of 10%.

But assuming your investment grows at a slower rate of about 10% per year, that can still be sufficient to build up a significant balance in the long run. If you were to invest $450 per month into the fund and it averages a 10% annual return, after 30 years of monthly investments, your balance would be around $1 million.

Putting that balance to work can then lead to a solid stream of dividend income

Once you’ve got the balance over $1 million, you can stop reinvesting dividend income and simply collect the cash flow. On a balance that significant, if the fund is still paying about 3%, then that would be enough to generate around $30,000 in annual dividends for your portfolio.

While a lot can change over such a long time frame, and there are never any guarantees with respect to future dividend payments, it’s an example of why investing in a top dividend ETF, such as the Schwab fund, can be an excellent way to build your balance and then use it to generate a ton of dividend income.