The big benefit of starting early in long-term investing is that years from now, you can potentially retire early. You may even be able to generate recurring income that you can live off of. Depending on where you live and the lifestyle you want, generating $50,000 in dividends every year could be enough for you to get by without having to rely on other sources of income.
But how do you set yourself up to accumulate that much in dividends? Below, I’ll show you how you can build your portfolio over the years to put yourself in a financially strong enough position where you can expect to generate $50,000 in annual dividends.
When it comes to dividends, you need money to make money. There’s no way around that. But if you have a lot of investing years left, you don’t need hundreds of thousands of dollars today. You can invest in an exchange-traded fund (ETF) that is focused on growth stocks and can result in a five-figure investment becoming more than $1 million decades later.
Although investing in the S&P 500 can be a safe option, an ETF such as the Invesco QQQ Trust (NASDAQ: QQQ) can be a better choice for the long term. The fund gives you exposure to the top 100 nonfinancial stocks on the Nasdaq exchange. This means you’re investing in some of the best growth stocks in the world. Over the long term, this has been a great way to outperform the market.
Assuming you can collect a yield of about 4.5% in the future, that means you would need to aim for a portfolio balance of more than $1.1 million. That balance would be enough to convert a 4.5% yield into about $50,000 in annual dividends.
Let’s also assume that the market won’t grow at its historical rate of about 10% but instead average a lower return in the long run. However, if you’re investing in the growth-focused Invesco fund, perhaps you may still be able to average an annual return of about 9%, which would factor in a slowdown in the future but potentially still outperform the S&P 500.
If you average a 9% return for 30 years, you need to invest about $83,000 today to get your portfolio to at least $1.1 million.
When you get close to retirement is when you’ll want to consider swapping out of a fund such as QQQ and into one that focuses on dividends. Investing in dividend stocks can lower your overall risk because these businesses generally are financially strong and posting regular profits. They are also often less volatile than growth stocks.
