Earn $2000 in Monthly Retirement Profits in 3 Easy Steps | Smart Change: Personal Finance
Unfortunately for many people, one source of retirement income will not be enough to sustain their lifestyle; It will take a multi-angle approach. Although some of the more obvious options for retirement income might be a 401(k) plan, IRAs, and Social Security, one underrated source of income is dividend payments.
Dividends are usually paid quarterly, and are a way to reward investors for investing in and holding stocks that may not have the excessive growth potential that often come with younger companies. With these 3 easy steps, you can get thousands of monthly retirement earnings.
1. Investing in ETFs that focus on dividend-paying companies
To receive a decent dividend income at retirement, you must first accumulate a good share of dividend-paying stocks. Doing this at an individual company can be difficult and may conflict with your investment goals or cause you to not be as diversified as you should be. This is where the distributed ETFs come into the picture.
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Dividend ETFs can give you the benefit of owning companies that focus on distributing profits and maintaining diversification, as many consist of hundreds of companies spanning all sectors. It also helps in distributing some of the risks involved in the dividend stocks, such as the company going through hard times and deciding to suspend the dividend, such as Delta Airlines And the Boeing Both did in March 2020 during the early stages of the COVID-19 pandemic.
There is no specific dividend yield that is considered “good” (largely because the dividend yield fluctuates with the stock price), but in general, you should look for ETFs that have a dividend yield of at least 2.5%. The higher it is, the more fun it is, but you want to be careful not to stray too rigidly from the dividend yield because it can be misleading. If a stock pays $3 in annual dividends and its stock price is $100, the return is 3%. If the stock price drops to $50, the return becomes 6% and it appears to be more profitable – except that it does not explain Why Behind the high yield.
2. Reinvest your earnings until you reach retirement
If you invest in dividend-paying stocks, you can either receive your earnings as a cash payment or enroll in the broker’s Dividend Reinvestment Program (DRIP) if they offer one. DRIP takes any dividends you receive and automatically reinvests them into the stock or fund that paid them out. If you have a DRIP option, you should seriously consider it; It can add to the effects of compound interest and work wonders.
Let’s imagine you invested $1,000 per month in a fund with a fixed dividend yield of 3% and returned, on average, 10% annually over 25 years. Here’s how the account totals will differ if you get cash dividends for reinvesting it:
|Reinvest the dividends||Total account after 25 years|
Ideally, you won’t need the dividend in cash until you retire, so you can allow it to grow and accumulate until then. Even if you don’t reinvest the dividends—although you should if you have the option—the $1.18 million accumulated in a fund that pays a 3% return will give you $35,400 in annual dividends. With the dividend reinvested, $1.86 million with a 3% return would pay out $55,800 in annual dividends. That’s $2,950 and $4,650 in monthly earnings, respectively.
3. It will require consistency
You don’t need millions of dollars in stocks to have a good dividend income when you retire, but you will need a good sum if you want thousands of monthly income. A number like a million dollars might sound like a lot on paper, but with consistency and an average dollar cost, it’s very possible if you give yourself time. By investing only $500 per month and average annual returns of 10% (including dividend yield), you can accumulate over $986,000 in 30 years. With only a 2.5% return, that’s over $2000 in monthly earnings.
Since you have a set investment schedule when using average dollar costs, it helps you stay consistent. You don’t want your investment to be choppy or find yourself trying to time the market (especially during a bear market when prices are dropping). The key is just consistency and letting time and compound interests do a lot of the heavy lifting for you.
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Stefon Walters has no position in any of the stocks mentioned. The Motley Fool recommends Delta Air Lines. Motley Fool has a disclosure policy.