Two Vanguard Index Funds Could Turn $400 a Month into an Annual Dividend Income of $16,800 for Retirement

The S&P 500 has outperformed nearly all other asset classes over the past decade, including bonds, international stocks, precious metals, and real estate. Additionally, the index has outperformed more than 85% of large-cap funds, which means that S&P 500 index funds often yield higher returns than professional money managers. With this knowledge, investors can build a portfolio that generates substantial amounts of passive income. For instance, $400 invested monthly into an S&P 500 index fund over three decades could grow to $789,500. This amount could then be reinvested, after capital gains tax, into a high-dividend index fund to generate $16,800 in annual passive income. The Vanguard S&P 500 ETF is a cost-effective index fund that tracks the performance of 500 U.S. companies, covering about 80% of domestic and more than 50% of global equity market capitalization. This allows investors to diversify their capital across many of the most influential companies worldwide. The S&P 500 achieved a 2,000% return over the last three decades, equating to 10.6% annually. With a conservative assumption of a 10% annual return, $400 invested monthly into the Vanguard S&P 500 ETF would be worth $789,500 after three decades. Investors could then sell this fund and reinvest the proceeds into another fund. Depending on the type of account, investors would need to pay capital gains tax upon selling the Vanguard S&P 500 ETF. Federal taxes would amount to approximately $100,000, with total deductions rounded up to $150,000, leaving $639,500 to reinvest in a high-dividend index fund. The Vanguard High Dividend Yield ETF measures the performance of 550 U.S. companies expected to pay above-average dividends. Unlike the Vanguard S&P 500 ETF, which includes growth and value stocks, this fund is heavily weighted towards value stocks. The current dividend yield is 2.63%, which would generate about $16,800 annually in dividend income with the $639,500 investment—a figure that is expected to increase over time. The Vanguard High Dividend Yield ETF achieved an 88% return over the past decade. At this rate, the total amount in the fund would reach $1.2 million in 10 years, generating approximately $31,600 annually in dividend income. The median worker in the U.S. earned $69,240 after taxes in 2023, according to the Census Bureau. Financial planners recommend saving 20% of net income for retirement, which amounts to $13,848 annually or $1,154 monthly. By comparison, $400 per month is a realistic goal for most people, leaving $754 monthly for additional investments, which could build a significant retirement fund. Before purchasing shares in the Vanguard S&P 500 ETF, consider the following: The analyst team at Motley Fool Stock Advisor recently identified the ten best stocks investors should buy now... and the Vanguard S&P 500 ETF was not among them. The ten selected stocks could generate enormous returns in the coming years. Just consider when Nvidia was added to this list on April 15, 2005... If you had invested $1,000 then, you would now own $708,348! Stock Advisor offers investors an easy-to-understand success strategy, including regular updates from analysts and two new stock picks per month. Since 2002, the service has more than quadrupled the return of the S&P 500.