July 2016 – Income Fund update

July was another solid month for growth and income. Click on to read my July Income Fund update.

Dividend Income

Total income from my Income Fund in July was $324, a 7% decrease compared to the $349 I received this time last year in July 2015. The decrease is because I exchanged some individual stocks for mutual funds, so this month’s income is lower but the June / Sep/ Dec income will be higher because of the fund payout schedule.

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

With total income of $4,329 so far this year, I’m still comfortably ahead of last July’s total ($3,601), even if the total didn’t increase as much this month from the lower monthly income. I’m also one month ahead over last year as this year’s total in July exceeds last year’s total in August.

Income breakdown

The chart below shows a breakdown of the $324 I received this month.

Individual stocks contributed $33 or 10% of the total this month. The two bond funds (VWEAX and VWESX) paid a total of $286 or 89%. Finally interest from the Income Fund cash reserves made up the remaining $4.

Dividend income from stocks

5 stocks paid dividends this month as detailed below.

Last July my individual stocks paid $51 from 9 stocks. Since then I’ve sold my shares in VPU, DOW, ALB & WPP as part of my plan to keep all international shares via VIHAX and exchange other non-core positions into VHDYX.

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. KO and KMB have the lowest dividend growth but still range between 6 & 7%. Top performers are CB with a 15% increase and JPM & ADP both having a 10% increase over the year.

Income from funds

I received income from the two Vanguard bond funds this month as shown below.

Fund Income ($) TTM Div Growth(%)
High-Yield Corporate Bonds (VWEAX) 244 -3.47
Long-Term Investment-Grade Bonds (VWESX) 42 -3.02

VHDYX and VIHAX do not pay any distributions in July.

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 a little since they’re bonds and are linked to interest rates. Together both bond funds had a total of $34 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 July 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 1% increase in the stock fund and a 1% decrease in individual stocks. Overall the Income Fund is at a 70:30 Stocks:Bonds allocation (counting cash as bonds).

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 (it’s at 17% currently), but I’ll be achieving this for the most part by adding new capital to the mutual fund components.

Likewise the bond funds are targeted for a 15% total weight; VWEAX is overweight here but it’s slowly shrinking (~ 0.4% a month) as I direct new money into stocks.

Fund Purchases & Sales

I added $2,300 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 $1,800 purchase of VHDYX ($900), VIHAX ($900) and Cash ($500).

I also exchanged $1,300 of Fund Cash into $853 of VHDYX and $447 of VIHAX.

Portfolio Performance

My Income Fund increased in value from $250,445 to $258,425 this month, a new record high, helped partly by the stock market and partly from the $2,300 of new capital.

The new capital I added ‘purchased’ 22.2071 shares of my Income Fund and the end of month share price increased by $2.33 to $106.1726, the highest it’s been. This represents a monthly increase of 2.24%.

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%
July-16 106.1726 2.24% 6.17% 258,424.97 243,459.16 8.44%

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 2.24%. I’m comparing this price performance to VTSAX which gained 4.12% in June, excluding dividends. My Year to date increase is 6.17%, compared to 8.44% 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 reduces the growth percentage because fund assets decreased by the distribution amount. A Total Return calculation would include the dividend plus the capital growth of the shares purchased with that dividend.

Comparing performance

Just for fun here’s a “growth of $10,000” chart with my Income Fund compared to VTSAX, (this data excludes re-invested dividends so it’s a growth of price, not total return).

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 a 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 in this case – even average performance beats the majority of active investors.

Outlook

VHDYX is a little ($435) under its target 2:1 ratio with respect to VIHAX so I should buy more VHDYX in August to balance it out. Trying to keep the funds at their target ratio allows me to put more money into whichever fund performs worse (is ‘cheaper’) each month.

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. This is really the same thing but it gives me practice in managing the Fund Cash flows since my paycheck will stop when I reach Financial Independence.

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 undecided in how large a cash buffer I should maintain – 3 months of the last dividend payouts or an entire year. It’s not important that I decide quickly on this so I’m going to wait and see for now.

Income for August will be similar to this month since only the bond funds and some individual stocks will pay any income.

Summary

Another solid month of income and I’m one step closer to FI although it still looks very far away. I’m on track to easily reach $8,000 dividend income this year and beat my goal of $7,800.

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


Quote of the Day

Start where you are. Use what you have. Do what you can.

 

6 thoughts on “July 2016 – Income Fund update”

  1. That chart showing your cumulative dividends year by year is incredible and must be so motivating! Right now, my own chart is very much in the early stages but I hope to have a similar trend, ie all going upwards! All the best with achieving your goal of $7800.

    1. Hi Weenie,
      Yes for sure 🙂 One good thing about starting out is that the early numbers tend to increase much faster. So that’s a lot of initial motivation. Then as you progress the overall progress / history continues the motivation.
      Congrats on being #2 in the Monkey Stocks League!
      Best wishes,
      -DL

    1. Hi DFG,
      Yes 3 months feels right to me; although I have a little more than that allocated in my brokerage at the moment. I may increase the amount I’m withdrawing monthly from the Fund for the last quarter of the month too.
      Thanks for stopping by – I hope everything’s well with you and your family!
      Best wishes,
      -DL

    1. Hi IH,
      Thanks for your support! It’s been a good year so far.
      Hope your summer is going well!
      Best wishes,
      -DL

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