Want thousands in monthly retirement income? Focus on dividends

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Jtrying to decide how much money you need for save for retirement can be stressful for many people. After all, there is no concrete answer as to how much someone will need; different lifestyles require different amounts.

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

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

Image source: Getty Images.

Take the time to build your portfolio

One of the few ways to achieve 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-oriented ETFs that contain companies that not only pay high dividends but also increased their dividend payouts for a time. With a dividend yield of 2.83%, the Vanguard High Dividend Yield ETF (NYSEMKT: VYM) is one such fund.

You probably won’t have hundreds of thousands of dollars that you can invest in a lump sum investment, but with averaging and patience, you can accumulate a sizable amount over time. Even if you take out the dividend yields, with a modest 8% annual return, you could accumulate more than $1.1 million by investing $10,000 a year for 30 years. Over those 30 years, you would have personally contributed $300,000, but your account would represent over $800,000 of that amount.

When building your dividend portfolio, one of the best things you can do is sign up for a dividend reinvestment plan (DRP). DRIPs take the dividends you receive and automatically use them to buy more shares of the respective company or fund. In addition to stock price gains, DRIPs add to the total return and increase the compounding effect.

Get rewarded in retirement

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

Here are the annual dividend payouts at different account amounts.

Account Total Annual dividend payments
$1 million $28,300
$1.5 million $42,450
$2 million $56,600

Data source: Author’s calculations.

At these account totals, you could receive over $2,300, $3,500, and $4,700 per month, respectively. And the dividend yield doesn’t have to be so high to produce notable returns; any dividend yield above 2.5% is considered good and can produce significant income in retirement.

Get your dividend payouts 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 in a brokerage account, that amount is subject to tax (i.e. your capital gain rate or regular income rate). Unlike a brokerage account, investments in a Roth IRA can grow and accumulate tax-free. Not having to pay tax on dividend payouts in retirement can easily save you thousands of dollars over time.

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

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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