June 2016 – Income Fund update

Brexit put a brake on the markets during June; the S&P 500 gaining 0.17% during the month for a total of 2.89% year to date. But it didn’t stop my dividend income and I made two new records this month for dividend income and total value! Click on for my Income Fund update.

Dividend Income

Total income from my Income Fund in June was $1,619, a 49% increase compared to the $1,083 I received this time last year in June 2015. The increase mostly came from my two stock funds and it’s the highest monthly income yet since I started my FI journey!

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

With total income of $4,005 so far this year, I beat last June’s total ($3,252) and even beat last August’s total of $3,987, so I’m two months ahead over last year! This is mostly from the June quarterly payout of the two Vanguard funds that I’ve been funneling most money into lately.

Income breakdown

The chart below shows a breakdown of the $1,619 I received this month.

Individual stocks contributed $191 or 12% of the total this month. The two stock funds (VHDYX and VIHAX) paid a total $1,145 or 71%. The two bond funds (VWEAX and VWESX) paid a total of $279 or 17%. Finally interest from the Income Fund cash reserves made up the remaining $4.

Dividend income from stocks

21 stocks paid dividends this month as detailed below.

Last June my individual stocks paid $136 from 19 stocks. Since then I’ve added 10 shares of XOM, 12 of LB, 16 of EMR, 11 of NHC, 10 of WMT, 10 of TROW and 16 of QCOM. Had I not bought any new shares since last year, the dividend payment this month would have increased from $139 to $145 by itself; a 6.9% increase. So the additional shares I bought contributed $45 to the increase this year.

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 10% over the last year. CVX and WMT have the lowest dividend growth of less than 3%. Top performers are LB, MAR and HD this month with 20+ percent increases over the year; their yields are lower however.

Income from funds

I received income from four Vanguard funds this month as shown below.

Fund Income ($) TTM Div Growth(%)
High-Yield Dividend (VHDYX) 697.64 7.1
High-Yield Intl Dividend (VIHAX) 447.48 n/a
High-Yield Corporate Bonds (VWEAX) 237.84 -5.8
Long-Term Investment-Grade Bonds (VWESX) 40.88 -19.5

VHDYX increased its payout a little over 7%. VIHAX is too new to have a year’s worth of history, but its current dividend implies a 4% yield which is the level I was expecting from this international fund (it’s about 1% higher than a total international fund).

The two bond funds pay their distributions monthly and are taxed as normal income – not the lower qualified dividend rate that dividends receive. Income decreased (this calculation isn’t very accurate as I couldn’t get precise data) since they’re bonds and are linked to interest rates. Together both bond funds had a total of $27 more income at this time last year compared to this year. Despite the decrease they still pay a good yield (4+%) but are suffering from the current low interest rate environment.

Asset Allocation

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

Compared to last month, International stocks have increased by 1% and Cash has decreased by 1%. The US stock allocation didn’t change overall, although there was a 2% increase in the stock fund and a 2% decrease in individual stocks.

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 $2,664 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 ($1,165), VIHAX ($665) and Cash ($200) along the lines of my target asset allocation.

In addition, I spent down some of the Fund Cash reserves. I exchanged $3,000 of Cash into $1654 of VHDYX and $1,345 of VIHAX. Towards the end of the month I also bought another $750 of VIHAX during the Brexit drop.

decided to sell my ETF holdings in VPU and VDE, exchanging the ~$5,000 proceeds into VHDYX and VIHAX.

Finally I sold all of my BBL shares for $214.72. This was a small holding that is covered in  VIHAX anyway, so I decided to simplify my portfolio and exchange the proceeds into VIHAX.

Portfolio Performance

My Income Fund increased in value from $245,254.41 to $250,445 this month, a new record high, helped partly by the stock market and partly from the $2,664 of new capital.

The new capital I added ‘purchased’ 25.6227 shares of my Income Fund and the end of month share price increased by $1.06 to $103.8416, 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 4.52%
June-16 103.8416 1.03% 3.84% 250,445.28 241,159.16 4.32%

I’ve been tracking my fund performance like an Index Fund since the beginning of the year and the underlying monthly investment performance in June was 1.03%. I’m comparing this price performance to VTSAX which lost 0.19% in June, excluding dividends. My Year to date increase is 3.84%, compared to 4.32% 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 “growth of $10,000” chart with my Income Fund 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 Income Fund 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 so I expect my total return to be lower.

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. Average doesn’t mean bad – even average performance beats the majority of active investors.

Outlook

VIHAX is a little under its targeted 2:1 ratio with respect to VHDYX so I’ll be buying a little more of it in July to balance it out. Keeping the funds at their target ratio allows me to put more money into whichever fund performs worse (is ‘cheaper’) each month.

I’ll be exchanging another ~$1,000 of Fund Cash into stock funds in July as I draw down my cash reserves, and I may purchase some individual shares as well. I want to keep as little cash in the Fund as I can but I 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.

Income from the next two months will be significantly lower than this month since only the bond funds and some individual stocks will pay any income.

Summary

A great month all in all with little real impact from the Brexit volatility. I’m on track to easily reach $8,000 dividend income this year and beat my goal of $7,800.

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


Quote of the Day

What happens is not as important as how you react to what happens.

 

17 thoughts on “June 2016 – Income Fund update”

    1. Thanks Pollie! I’ve been much more aggressive in converting my cash reserves into stocks this year and the results are certainly showing this month!
      Best wishes,
      -DL

  1. Impressive progress! What is your thinking behind VWEAX ? It looks like it has under performed since it’s inception and the dividends have also shrunk each year as well from .04 / quarter to about .028 / quarter. Although the yield is still quite attractive it seems counterproductive to me, don’t we want our dividends to grow over time? I’m no expert but what am I missing with these bond funds ? Thx

    1. Hi Maggie,
      That’s a good question and I certainly have the same question each time I write my monthly status. The yield isn’t bad and the monthly income is nice too, plus they typically go up in value when the stock market goes down. I’ve been considering selling VEWSX more than VWEAX at the moment; possibly in September so I’d get two more months of income from it and still earn September stock dividends from the exchange. With VWEAX, I think I’d lose a fair bit of income if I sold right now since the 5% it generates wouldn’t be replaced from stocks.

      But what has kept me from selling in general is a longer-term view. They should produce better income in a rising-interest rate environment as expired bonds get replaced with higher yielding ones. And in the case of a recession companies would have to prioritize repaying their debt (bonds) at the cost of paying dividends. So my current strategy has been just to hold them as a small percentage of the portfolio, and although they “lost” $27 of income compared to last year, they contribute nearly half of the total income which is much more than their asset allocation.

      I definitely need to write a more detailed post for / against holding them though 🙂

      Best wishes,
      -DL

  2. Congrats on that impressive dividend income total for the month along with an equally impressive year over year growth figure. Full steam ahead, right? Between stocks and those funds you are building up an nice diversified passive income stream. I see LMT and TROW paying you in June. Two names I’d like to add to my portfolio one day. Thanks for sharing.

    1. Thanks DH:) I’d definitely like to own more of LMT; they’ve been just a little more expensive than I’d like when I’ve looked at buying. I like TROW’s yield and that they’re debt-free; their stock performance hasn’t been all that great of late so I think they’re better valued at present.
      Hope you had a great summer!
      Best wishes,
      -DL

  3. This is a really awesome update DL, nice job! The fact you’re so far ahead of last year is really impressive. I liked looking at your pie chart of what your asset allocation is.

    Your portfolio has really grown well, considering how little help it’s had from the overall index 🙂 Keep it up.

    Tristan

    1. Hi Tristan,
      I think a large part of the success in investing, simply comes from saving more. So I try to throw as much money as I can at my Income Fund in the hope that most of it will stick! 🙂
      Best wishes,
      -DL

  4. Beating your goal always feels good. Looks like your easily on track especially if you keep drawing down your cash reserves. I still own a few shares of BBL but weren’t worth selling even after the cuts. $250k is very impressive DL. I hope to be there soon.
    Cheers,
    DFG

    1. Hi DFG,
      Thanks! I hope you are having a successful summer too. My BBL shares probably weren’t worth selling, but it’s a little less on the tax forms at the end of the year and goodness knows my Tax Preparer needs all the help they can get to file my taxes correctly!
      Best wishes,
      -DL

  5. Impressive progress my friend. I really like the amount of detail you put into your analysis. I also like having a good mix of stocks and funds. I find that it helps me have some fun with my money(individual stocks and cash) while still continuing my automatic contributions(which flow into etfs and funds since I don’t have to do any due dilligence there). It might be a bit more boring than a full out dividend portfolio but I find it a bit less stressful since I’m spacing my money out across a ton of securities and don’t have to worry too much about individual securities tanking or cutting their dividend!

    1. Hi TimeInTheMarket,
      Yes writing about mutual funds or ETFs doesn’t for a great blog make! I reached a similar conclusion to you after I originally started out most in stocks. Now I try to limit individual stocks to a smaller percentage almost as ‘play money’.
      I do think funds are the easiest way to invest and certainly less stressful. They can reduce risk via diversification as you mention – when KMI cut their dividend earlier this year it barely changed VHDYX’s payout since they were such a small percentage of the total. As long as you keep an eye on the Expense Ratio, I think that the fees are well worth paying for the convenience and even perhaps overall performance.
      Best wishes,
      -DL

    1. Thanks Dan! I must admit that my goals are usually fairly conservative as I don’t want to encourage myself to stretch for yield in order to beat them. I’m hoping for a good payout in September and December that’ll give a boost to the income.
      Sorry for the age it’s taken to reply! Wishing you all the best on your own journey to FI!
      -DL

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