How Long Does It Take to Build $2,000 Per Month in Passive Dividend Income? Here's What History Says.
Key Points
Assuming you're not starting with hundreds of thousands of dollars, an automatic monthly investment program is your best bet.
Save aggressively, but don't be overoptimistic about return expectations.
Based on history, here's how long it's likely to take based on different return and monthly investment amount assumptions.
Most investors imagine a day when they can relax and collect paychecks from their investments rather than from their employer.
It turns out that earning monthly dividends from your portfolio isn't that difficult. But earning thousands of dollars in dividends requires a little more work and careful planning.
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Specifically, it'll require a substantial investment, or you need to establish a systematic monthly investment plan that eventually gets you to that point. But your concerns don't stop with your account balance. The portfolio needs to be built in a diversified way to ensure your monthly income stream is durable and sustainable.
Image source: Getty Images.
Building a $2,000 monthly income portfolio
Let's imagine you're starting from a point where you have the necessary account balance to generate a $2,000 monthly dividend income right now.
I consider the Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD) to be perhaps the best dividend ETF in existence today. It's built on a portfolio of high-quality, high-yielding dividend growth stocks and offers a current yield of 3.3%. That means you could generate the equivalent of $2,000 a month in dividends (the fund actually pays out quarterly) with an investment of roughly $730,000.
As great as I think the Schwab U.S. Dividend Equity ETF is, I don't believe it should be the only fund in your portfolio. It's tilted heavily toward more mature, defensive, and value-oriented companies. There's nothing wrong with owning that kind of portfolio, but it misses out on a large segment of the U.S. equity market, namely tech and growth stocks.
You don't have much room for low- or zero-yielding tech stocks in a portfolio that needs to generate $2,000 a month in dividends. But it should be diversified and balanced enough that you're not over-reliant on any one sector or theme.
The hypothetical $2,000 monthly income portfolio
A portfolio aiming to generate this level of income should lean heavily on traditional equity income ETFs. But having a core U.S. equity position as a foundation, with a fixed-income ETF to provide some balance, is a smart idea for long-term durability.
Consider this hypothetical allocation:
| ETF | Allocation | Yield |
|---|---|---|
| Vanguard Morningstar Total Stock Market ETF (NYSEMKT: VTI) | 25% | 1% |
| Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD) | 25% | 3.3% |
| iShares Core Dividend Growth ETF (NYSEMKT: DGRO) | 15% | 2.1% |
| Vanguard High Dividend Yield ETF (NYSEMKT: VYM) | 15% | 2.4% |
| Vanguard Total Bond Market ETF (NASDAQ: BND) | 20% | 5.1% |
| Total | 100% | 2.8% |
Data source: Fund websites.
This feels like a reasonable trade-off. You give up about 0.5% in yield compared to investing only in the Schwab U.S. Dividend Equity ETF. But you add a core equity fund, a dividend growth fund, a high-yield fund, and a fixed-income fund. That's a much more well-rounded portfolio that should mitigate some volatility while maintaining a solid yield target.
At a 2.8% annualized yield, you would need to invest roughly $857,000 in this portfolio to generate a $2,000 monthly dividend income.
How long does it take to reach $857,000?
I'm guessing most of you reading this don't have this much money sitting in your brokerage account right now. If that's the case, the first step will be to develop a plan to reach that milestone.
How long it takes to get there depends on how much you'd be investing monthly and what kind of return you'd get. Historically, the S&P 500 (SNPINDEX: ^GSPC) has returned about 10% per year. But this portfolio includes bonds and a heavy overweight in more conservative equities. That may not be the best assumption for the return.
So let's take a look at these more reasonable return/investment scenarios:
| Monthly investment | 6% return | 8% return | 10% return |
|---|---|---|---|
| $500 | 38 years | 32 years | 28 years |
| $1,000 | 28 years | 24 years | 21 years |
| $1,500 | 23 years | 20 years | 18 years |
| $2,000 | 19 years | 17 years | 16 years |
Data source: Author's calculations
Obviously, it's going to take some time to reach nearly $1 million in savings. But you can cut the time it takes to get there by half or more, depending on how aggressive your savings rate is.
Your total return will clearly matter a lot as well, but that's not a piece you can control. When it comes to long-term savings goals, it's almost always better to be more conservative in your assumptions. If you plan low and you happen to exceed it, it's just a bonus that you got there faster.
Regardless, start with an affordable monthly contribution, increase it regularly whenever possible, automate the process, and take advantage of 401(k) matches. If you can do that, thousands of dollars in passive income each month are well within your reach.
David Dierking has positions in Schwab U.S. Dividend Equity ETF and Vanguard Morningstar Total Stock Market ETF. The Motley Fool has positions in and recommends Vanguard High Dividend Yield ETF and Vanguard Total Bond Market ETF. The Motley Fool has a disclosure policy.