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How to create a yearly income of $100,000 in dividends

Want to create a yearly income of $100,000 in dividends? You can set your wealth on course for a great outcome.

Here is how you can do it:

First step: Earn and save

Money doesn’t just magically appear, sadly. To grow your wealth you have to put in the effort to earn money, then spend less than you earn.

Everyone’s budget is different. Everyone does different work. There’s no ‘right’ answer about how much you should earn or you should save. Whether you earn $50,000 or $150,000 it’s how much you can save that counts.

Obviously you need to spend money to cover the basics, but after that it’s a combination of earning more and avoiding lifestyle inflation for every one of your additional dollars.

Next: Invest

Now that you’ve gotten some savings you need to put it to work for the long-term.

I think there are two main avenues of investing that would be best for your wealth and/or life.

The first avenue is to spend as little time looking at shares as possible, invest in diversified shares, don’t worry about them and ignore market volatility. Not only should this result in perfectly good compounded returns, but more importantly it gives you more time to spend earning or on your personal life. In my opinion, some good options include Magellan Global Trust (ASX: MGG), Vanguard MSCI Index International Shares ETF (ASX: VGS) and iShares S&P 500 ETF (ASX: IVV).

The other avenue is trying to maximise your invest returns as much as possible. I definitely don’t mean finding as speculative shares as you can. To me, it means finding quality ASX shares trading at attractive prices for long-term investment returns. I think some good current examples include Challenger Ltd (ASX: CGF), Costa Group Holdings Ltd (ASX: CGC), REA Group Limited (ASX: REA) and WAM Microcap Limited (ASX: WMI).

Finally: Re-invest until the goal is reached

Compounding works best when you re-invest the dividends into buying more shares. You don’t even have to use the dividend re-investment plans, you can take cash and choose the best opportunity you can see.

With a portfolio grossed-up dividend yield of around 6% it would take a portfolio of $1.66 million. That sounds like a lot of money. It is a lot of money. But, starting with $0 and investing $1,000 a month, compounding at 10% a year, it would only take 27 years to make your $100,000 yearly income a reality.

It could be quite possible to invest more or compound faster than 10% a year, bringing you to your goal quicker.

If you want to achieve returns faster than 10% a year, then shares like Challenger could be exactly what your portfolio needs.

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Motley Fool contributor Tristan Harrison owns shares of Challenger Limited, COSTA GRP FPO, MAGLOBTRST UNITS, and WAM MICRO FPO. The Motley Fool Australia owns shares of and has recommended Challenger Limited and COSTA GRP FPO. The Motley Fool Australia has recommended REA Group Limited and Vanguard MSCI Index International Shares ETF. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.