How Many ETF Shares You’d Need to Replace Your Salary With Dividends

Key Points

• The average American currently makes about $65,000 each year.

• There’s a simple formula for determining how much you’d need to invest in an ETF or stock to replace your salary.

• The Vanguard High Dividend Yield ETF and Schwab U.S. Dividend Equity ETF are two of the top dividend ETFs that you could buy to start offsetting your salary.

• 10 stocks we like better than Schwab U.S. Dividend Equity ETF ›

The average American salary is currently about $65,000 a year, according to the Bureau of Labor Statistics. Your salary might be much higher or lower than the national average. However, we’ll use this median as our baseline to determine how many ETF shares the average person would need to buy to replace their salary entirely with dividends.

It’s actually a rather simple formula that you can easily translate to your own situation. Divide the income target by the fund’s current yield and then divide that number by the current share price to reach the number of shares you’d need to own. Don’t worry if math isn’t your thing. I’m going to run the calculations on two of the largest, most popular dividend ETFs:

Vanguard High Dividend Yield ETF (NYSEMKT: VYM) and

Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD). That way, you can see the impact that a fund’s current yield has on this equation.

Image source: Getty Images.

The Vanguard High Dividend Yield ETF

The Vanguard High Dividend Yield ETF is the third-largest dividend-focused ETF by assets under management (AUM) at $84.5 billion. It has a very simple investment strategy. The ETF passively tracks the

FTSE High Dividend Yield Index, which aims to measure the investment returns of stocks with high dividend yields (excluding REITs).

The ETF currently holds over 600 high-yielding dividend stocks. It collects the dividends paid by its holdings and distributes them to investors each quarter. It has paid $3.63 per share in dividends to investors over the last 12 months. That gives it a trailing-12-month yield of

2.2% based on its recent share price of

$165. I bolded the numbers that we need for this calculation.

First, we’ll determine the required investment to generate the $65,000 in annual dividend income needed to replace the average worker’s salary. That calculation is $65,000 / 2.2% = $2.95 million. Now, we’ll determine the number of VYM shares you’d need to hold to hit that investment level. This calculation is $2.95 million / $165 = 17,905 shares.

That’s obviously a significant amount of money and a lot of shares to buy. However, that’s one ETF option. Others with higher yields — such as SCHD — can help reduce the total investment requirement.

The Schwab U.S. Dividend Equity ETF

The Schwab U.S. Dividend Equity ETF is the second-largest dividend-focused fund, behind the

Vanguard Dividend Appreciation ETF, with $112.3 billion in AUM. It has a similar investment strategy. SCHD passively tracks an index focused on high-yielding dividend stocks (

Dow Jones U.S. Dividend 100 index).

However, this index has a narrower scope. It screens dividend stocks based on several dividend-quality characteristics, including yield and the five-year dividend growth rate. As a result, it holds about 100 stocks.

Over the last 12 months, this ETF has paid $1.05 per share in dividends. With a recent price of around

$35 per share, its trailing 12-month yield is

3%.

Now we’ll run through the math for how much SCHD you’d need to replace the average American salary: $

$65,000 / 3% = $2.17 million, or 13,156 shares at the current $35 price tag.

That’s a much lower capital requirement than VYM for the same annual income, due entirely to SCHD’s higher yield. SCHD’s 36.4% higher yield than VYM’s reduces your capital requirement by 26.5%. Investors aren’t taking on any additional risk for that higher yield, as the index SCHD tracks screens for quality, while VYM’s passively tracked index simply screens for yield. That focus on quality has paid off. SCHD has outperformed VYM over the last 10 years (12.7% average annual total return vs. 11.6%).

Meanwhile, despite its focus on yield, some of VYM’s top holdings don’t currently boast the highest yields due to price appreciation (for example, its top holding, Broadcom, with a 7.4% allocation, has a 0.7% yield after surging 333% over the past three years).

You can’t replace your income overnight

You’d need over $2 million to replace the average American salary with income generated by one of the top dividend ETFs. This exercise illustrates what you’d have to build toward over the long term by routinely buying more shares of a dividend ETF to grow your income. It is possible to reach that goal over time, with SCHD currently offering the quicker of the two paths, thanks to its higher yield (it has also historically delivered strong annual dividend growth).

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