The ETFs I’ll Use To Turn $130,000 into $100,000 a Year in Dividend Income

With a world of new investors coming into their own and starting to take control of their own finances, there is a giant shift toward dividends as a method of earning passive income. To be fair, dividends aren’t new, but there is no doubt a resurgence of interest in them.

Many investors, including Redditors who are vocal advocates of this dividend resurgence, are considering how to redirect some of their money from the S&P500 to generate passive income from dividends. This is a solid strategy, and one that likely gives people another avenue of setting themselves up for a comfortable retirement.

The Starting Point Challenge

This individual Redditor, who posted in r/dividends, is looking at how to create some wealth through passive income. Their plan, for better or worse, is to take the $130,000 they have in free capital and create a dividend-focused portfolio that can generate at least $100,000 per year in earnings. It goes without saying that this is not a small amount, and I would immediately ask them how they intend to do this because $130,000 is a lot of money for someone’s income, but not nearly enough to generate six-figure worth of dividend returns.

Let’s assume, just for a moment, that they invested all of this money into the S&P500, which has returned an average of 11.8% percent in the last 10 years, you’d only be earning around $15,340 per year in interest, which would undoubtedly compound, but you’re not getting anywhere near the six-figure mark anytime soon.

For this reason, entering the dividend world and looking beyond traditional dividend stocks like Verizon and Pepsi will be necessary. In other words, the only recommendation I and others in the r/dividend world can make is to find some higher-yield strategies.

This likely means that this individual, or anyone else I can recommend, should consider specialized ETFs like QQQI or SPYI, which regularly pay out double-digit yields by selling options across major indexes. The best reason to look at these funds is that they prioritize cash flow over long-term price appreciation, whereas the opposite is true for S&P 500 stocks.

The Plan to Grow Dividends

If I had to make a recommendation to this individual, I would absolutely say that their only hope of achieving this lofty goal is to look at the high-yield ETFs. Knowing that they are currently paying out between 11% and 14% annually, especially QQQI and SPYI, is the way to go.

For example, if you invested $130,000 in QQQI right now, you’d make approximately $18,200 in one year, while SPYI would generate around $15,600. The key is to DRIP, or reinvest dividends, a favorite acronym among Reddit and dividend investors that essentially means you’ll reinvest all your dividend earnings to continue compounding your income.

Over time, the hope and the belief are that the combination of reinvested dividends is going to create something of a snowball effect. If you go down this path, you are likely looking at around 13 years, without any other contributions, in order to hit the $100,000 number, and it’s a big if because the QQQI yield would have to stay at 14% that whole time.

Now, things change a little if the Redditor decides to try to make some income-based investments along the way. Adding just $10,000 every year shaves off two full years before someone is earning $109,000 plus with this $130,000 starting point strategy.

It’s not impossible to think that compound investments through DRIP and new contributions could help you hit the $100,000 mark in just five years, but it’s going to require a significant level of financial discipline.

This Strategy Comes With Big Risks

Here’s the thing about dividend incomes and the biggest piece of advice I would want to give anyone considering a strategy like this one. These high-yield investments, like QQQI, SPYI, and big names in the space right now like ULTY and MSTY, do provide an income stream, but they do so at the risk of growth.

This means that the share price you bought in could decline compared to growth-focused dividend ETFs like QQQ or SPY. This is the biggest caution and red flag in that this Redditor might start to make their way toward their $100,000 goal, but their initial $130,000 investment could be under $100,000 in value over the course of a year.

The way to try and resolve some of this is to dollar cost average and buy $130,000 worth of shares, but not all at once, so you have protected some of your downside. These covered call strategies are highly dependent on market volatility, which is currently evident in global trade, tariffs, and similar issues. However, if the situation becomes less volatile, things could change rapidly, and these high-yield payouts could start shrinking, dramatically so.

Despite all of the risks, what I would recommend to someone thinking about this is two-fold. The first is to talk to a financial advisor and get some really good advice before you go down this road. They might try to talk you out of it, or, at the very least, they will help you figure out dollar cost averaging so you are protected. The second piece of advice is to talk to a tax consultant and understand exactly how the dividend returns will affect your money come tax time.

Of course, I also feel compelled to mention that this individual, or others who want to do something similar, need to factor in stocks. These dividend earnings will be taxed as ordinary income, reducing the total return. This means that in order to take home $100,000 annually, you need to make as much as $137,000 if you are in the highest tax bracket.