1 High-Yield ETF Could Turn $400 Per Month Into $50,000 In Annual Dividend Income

Building a portfolio of dividend stocks that can replace all or some of your paycheck is a big goal for many retirement savers.

There are several benefits to living exclusively off the dividends your stocks pay. You'll likely receive a steadily increasing paycheck every year, and you'll probably never have to sell your shares. That could let you leave a lot of money to your heirs. What's more, it can be incredibly tax-efficient.

Building a portfolio that pays you $50,000 in annual dividends doesn't have to be complicated. You don't need to constantly buy and sell stocks or invest exclusively in risky, high-yield dividend stocks. You can build a stream of dividends exceeding $50,000 per year just by consistently investing $400 per month in a single ETF: the Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD).

A fund focused on high-quality dividend payers

The Schwab U.S. Dividend Equity ETF tracks the Dow Jones U.S. Dividend 100 index. The stocks in the index have all paid dividends for at least 10 consecutive years and have the balance sheets and cash flow to support those dividends. The committee focuses on qualifying companies with the highest dividend yields and dividend growth rates. So, not only are these strong dividend payers, but they should remain strong and raise their dividends in the future.

The biggest holdings in the Schwab U.S. Dividend Equity ETF are:

1. Texas Instruments (2.6% dividend yield)

2. Amgen (2.9%)

3. Lockheed Martin (2.7%)

4. PepsiCo (3%)

5. Chevron (4%)

6. Pfizer (5.9%)

7. Coca-Cola (3.1%)

8. Verizon (6.7%)

9. United Parcel Service (4.4%)

10. Blackrock (2.5%)

The mix of high dividend yield stocks and stocks with a good yield and high dividend growth potential produce a combined 3.46% trailing dividend yield. As mentioned, the stocks included in the fund also typically raise their dividends every year. Over the last five years, the fund's total dividend distribution had a compound annual growth rate of 11.8%. While dividends likely won't grow at that rate every year, investors can expect dividend growth to exceed inflation in most years, providing a nice hedge against rising costs in the future.

How $400 per month could generate $50,000 in annual dividends

The Schwab U.S. Dividend Equity ETF has produced an annualized total return of 12.83% since its inception in late 2011. Investors shouldn't expect those kinds of returns indefinitely, though. The fund has benefited from exceptionally strong market conditions since its inception. The S&P 500, for reference, has returned an average of 14.6% since the Schwab U.S. Dividend Equity ETF came into existence.

As such, a reasonable expectation for the fund going forward is slightly less than the historical returns of the S&P 500. Longer-running dividend-focused funds have an annual return of about 8.5% when you include dividends. That seems like a fair expected return. That translates into approximately 5% in capital appreciation combined with its dividend.

If you consistently put $400 into the Schwab ETF month after month and reinvest the dividend distributions, you'd eventually build a big portfolio paying a significant amount in dividends every year. Here's what your account balance would look like over time based on steady monthly returns equal to 8.5% per year and the fund's current dividend yield.

Table source: author. Calculations by author.

If you can consistently save and invest for 40 years, $400 per month can turn into $51,340 in annual dividends based on the fund's current yield. What's more, even when you start spending those dividends on living expenses instead of reinvesting them, you can expect your income stream to keep growing every year as the stocks in the fund raise their payouts.

There are some important things to note, though. First of all, the above returns are theoretical, based on an estimate of what you can reasonably expect the fund to return in an average year. As any investor knows, the stock market doesn't go up in a straight line. The good news, though, is that the large-cap value stocks held by the Schwab U.S. Dividend Equity ETF generally fare better than average in down markets. As a result, total returns from year to year will be less volatile than other funds.

Another thing to consider is that dividend yields may decrease or increase in the future. Average yields have declined over time, and that decades-long trend may continue. If so, the dividend stream won't be as strong.

Lastly, long-term investors should consider whether $50,000 in dividend income 40 years from now is sufficient for retirement. While it might sound like a lot today, inflation will slowly (or sometimes quickly) erode the buying power of that money. If you're currently spending $50,000 per year on living expenses, $50,000 in the future likely won't be enough to live on in 40 years, all else being equal.

Still, if you consistently put your extra cash into the Schwab U.S. Dividend Equity ETF every month, you'll be sure to build a nice portfolio of stocks paying you a good amount of dividends every year.

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Adam Levy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chevron, Pfizer, and Texas Instruments. The Motley Fool recommends Amgen, Lockheed Martin, United Parcel Service, and Verizon Communications. The Motley Fool has a disclosure policy.