May 2016 – Income Fund update

The US Stock Market fell towards the end of the month but ended up higher than at the beginning; the S&P 500 gaining 1.5% during the month for a total of 2.6% year to date. There were the usual concerns about possible actions from the Federal Reserve, the price of Oil, the upcoming Brexit vote in June and a million other things happening around the world. But tuning out all the noise, how did my Income Fund do?

Dividend Income

Total income from my Income Fund in May was $401, a 5.8% increase compared to the $379 I received this time last year in May 2015. The increase mostly came from my individual dividend paying stocks.

The following chart shows the cumulative dividend income so far this year compared to previous years.

With total income of $2,386 so far this year, I continued to beat last May’s total ($2,169) and make steady increases over last year.

Income breakdown

The chart below shows a breakdown of the $401 I received this month.

Individual stocks contributed $98 or 24% of the total this month. The two Vanguard bond funds paid distributions for a total of $297 (74%) and interest from my Income Fund cash reserves made up the remaining $6.

Dividend income from stocks

9 stocks paid dividends this month as detailed below.

Last May my individual stocks paid $76 from 8 stocks. Since then I’ve added $768 of LNT last November. RTN didn’t show up last year as I included their dividends in April, not in May.

I’ve included the dividend growth of each stock on a 1-year trailing basis in the table. Dividend growth is calculated from the last 4 payouts compared to the 4 before that. The yield calculations are annualized, or extended forward a year, based on the current dividend payment against the market value.

On average, dividends of the stocks I hold have increased by nearly 6% over the last year. T and PG have the lowest dividend growth of less than 3%. Top performers are AXP and RTN this month with double-digit increases over the year; their yield is lower however.

Income from funds

I received income from two Vanguard bond funds this month as shown below. The stock funds I hold won’t pay dividends until next month.

Fund Income ($) TTM Div Growth(%)
High-Yield Corporate Bonds (VWEAX) 254.67 -2.67
Long-Term Investment-Grade Bonds (VWESX) 42.05 -3.53

The two bond funds pay their distributions monthly and these are taxed as normal income – not the lower qualified dividend rate that dividends receive. Income decreased since they’re bonds and are linked to interest rates; but I gained more shares during the year so there was a slight increase in income overall.

Asset Allocation

Here’s my Income Fund asset allocation as of May 2016.

Compared to last month, cash has decreased by 6% and stocks have increased by 6%.

Detailed Allocation

The following table shows the detailed asset allocation.

I’m still slowly rebalancing to my target asset allocation. My long term plan is to limit individual stocks to 10% of the total, but I’ll be achieving this for the most part by adding new capital to the mutual fund components rather than selling individual stocks.

Likewise the bond funds are targeted for a 15% total weight.

Fund Purchases & Sales

I added $2,560.48 of new money to the Fund this month; all leftover income that isn’t used for Living Expenses, Savings and my Emergency Fund is transferred into the Fund’s cash account first, and I then purchase investments from the Fund’s Cash account.

This amount includes an automatic monthly $2,000 purchase of VHDYX ($1,100), VIHAX ($600), VWESX ($100) and Cash ($200) along the lines of my target asset allocation. The Cash will be used to buy individual stocks from time to time. I also bought $550 of VIHAX because it was under-performing VHDYX by the end of the month.

In addition, I spent down some of the Fund Cash reserves. I bought 12 shares of LB for $808 and as I mentioned last month, I also bought $13,166 of VHDYX. These purchases caused the Cash allocation to drop from 11.6% to 5.8% this month.

Portfolio Performance

My Income Fund increased in value from $242,392.87 to $245,254.41 this month, a new record high, helped largely by the stock market although I added $2,560 of new capital.

The new capital I added ‘purchased’ 25.2127 shares of my Income Fund and the end of month share price increased by $0.1144 to $102.7813, the highest it’s been.

Date Price ($) Change YTD Change Value Cost Basis VTSAX YTD
Dec-15 100.0000 0.00% 0.00% 215,011.28 215,011.28 0.00%
Jan-16 97.9494 -2.05% -2.05% 212,642.17 217,045.51 -4.18%
Feb-16 97.5142 -0.44% -2.49% 221,690.30 227,034.95 -4.22%
Mar-16 101.9418 4.54% 1.94% 236,992.29 232,228.37 2.04%
Apr-16 102.6669 0.71% 2.67% 242,361.27 235,934.98 2.70%
May-16 102.7813 0.11% 2.78% 245,254.41 238,495.46 2.90%

I’ve been tracking my fund performance like an Index Fund since the beginning of the year and the underlying monthly investment performance in May was 0.11%. I’m comparing this price performance to VTSAX which gained 1.77% in May, excluding dividends. My Year to date increase is 2.78%, compared to 2.91% for VTSAX.

The growth percentages only reflect price changes, not total return. Total Return is higher since I pay a monthly dividend from the Income Fund, which lowers the price and thus the growth percentage. A Total Return calculation would include the dividend plus the capital growth of the shares purchased with that dividend.

Just for fun here’s a typical “growth of $10,000” chart with my investments compared to VTSAX, (this data excludes re-invested dividends).

VTSAX has a different composition than my portfolio so I expect different results. It contains US-only stocks and includes small-cap stocks whereas my investments contain US large-value stocks, international value stocks and (volatile) US bonds. Over the long-run a 100% stock allocation should always beat an 85:15 stock/bond allocation. I’ll add dividend payments to this chart too once more have been paid out – my fund’s dividend payments are much smaller than VTSAX’s.

Does the relative performance matter? Not to me; it just puts a boundary on the results to put it into perspective. VTSAX, being a total stock market fund, indicates the average performance that can be achieved by the US Stock Market.

Outlook

I made my large $13,000 purchase of VHDYX via an automatic purchase on a pre-determined date; it’s not worth trying to manually pick the best day to buy. As it happened, my purchase was on a more expensive day of the month although the price has still gone upward from there. The reality is that a small percentage delta in the price now will have little overall impact in 30 years’ time; and that subsequent purchases will, on average, balance out more expensive / cheaper purchases.

Both VHDYX and VIHAX are at their targeted 2:1 ratio with respect to each other. Keeping the funds at their target ratio allows me to put more money into whichever fund performs worse each month, so I’m automatically buying more of the ‘cheaper’ fund.

I’ll be exchanging another $3,000 of Fund Cash into stock funds this month as I draw down my cash reserves. I want to keep as little Cash in the Fund as I can but I do need to keep a certain buffer for smoother cash-flow.

I’m continuing to withdraw $540 each month from Fund Cash which goes towards my Living Expenses. Although I’m ‘withdrawing’ money, it just means that I can put more of my paycheck towards investing; it’s really the same thing but gives me practice in managing the Fund Cash flows since my paycheck will stop when I reach Financial Independence.

Summary

Steady progress this month again. Dividend income was up a little. Most of my purchases of late have been in the stock funds so I won’t see higher income from them until June – I’m expecting a bigger than average increase since the majority of my purchases over the last two months will contribute to higher income next month.

How was your May? Are you one step closer to Financial Independence?


Quote of the Day

A tragic irony of life is that we so often achieve success or financial independence after the chief reason for which we sought it has passed away.

 

11 thoughts on “May 2016 – Income Fund update”

  1. You have to love a dividend income graph like yours! that is great progress that you make month after mont, year after year!
    The question for me: how close to $8000 will you end the year?!?

    Interesting that you pick ETFs for dividend income. I looked at that as well. No final conclusion yet.

    1. Hi atl,
      Good question – my conservative projection is currently at $7,961 ($39 short) but I’m optimistic on beating $8,000. It’s hard to estimate the fund dividends in advance.
      I have two ETFs holdings (Energy and Utilities) – this was really for “easy diversification” since I wasn’t finding a lot of energy and utility companies that I wanted to buy individual shares of.

      Best wishes,
      -DL

  2. A very healthy total for passive income earned for the month of May and from a diverse set of assets from stocks to various funds. Nice to see a handful of names in common between our portfolios too. I kind of like RTN and the space in general. I still have no exposure to any defense companies. Thanks for sharing.

    1. Hi DH,
      I like both RTN and LMT in that sector; I tend to favor LMT more as it seems a little more diverse in its business areas but both have been a little expensive of late to add more. They both have somewhat of a moat in that they have established government contracts requiring years of support and it’s probably hard for startup companies to get into new contracts. Plus defense companies tend to be on the cutting-edge of new technology and who knows where that can lead, just like the Microwave technology from RTN.
      Thanks for your support as always, and I look forward to your May report!
      Best wishes,
      -DL

  3. Wow , what a comprehensive monthly breakdown. Put’s mine to shame I have to say. Good work. I was wondering if you have thought about adding in any municipal bond funds since they have some tax benefits. Keep up the good work.

    1. Hi Captain,
      Yes I’m definitely quite OCD about my updates!

      I have considered municipal bond funds, especially since I’m holding my bond funds in Taxable accounts. But I keep reading about possible AMT triggers so I’ve not bought any yet until I’m confident that I won’t need to pay AMT. Most of Vanguard’s tax-exempt funds don’t seem to have AMT holdings (but are allowed to); although the newer VTEAX looks to be okay.
      Thanks for stopping by – you had a great May too and it’s good to see some common stocks between us (GIS, PG, T, CLX)

      Best wishes,
      -DL

      1. I only have one at the moment (PZA) and it is AMT free as well. I have a few others on my watch list too. I’m quite new to this arena and I’m learning all sorts of things I need to avoid. AMT is one, as are funds with exposure to states like Illinois or California, as well as high fees. It’s a lot like screening for stocks but using other metrics instead.

  4. I hope I am one step closer to freedom. I have some major changes in May/June that will affect my dividends temporarily. Will post that soon. Cheers on another good month and more dividends!
    Later,
    DFG

    1. Hi DFG,
      You’re doing all the right things so I’m sure you’re closer! I’m curious what the major change is so I look forward to reading about that!
      Best wishes,
      -DL

    1. Hi Tristan,
      Thanks! June and December are usually the best months for dividend income here in the US. I’m curious to see how things are in Australia – I didn’t realize you use a different year end over there!
      Wishing you all the best on your FI journey,
      -DL

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