September 2016 – Income Fund update

It’s the middle of October and I’m behind in my monthly updates again. Let’s take a look at my Income Fund progress for September 2016.

Dividend Income

Total income from my Income Fund in September was $1,432, a 55% increase compared to the $919 I received this time last year in September 2015. The majority of new investments that I’ve made over the last year has been in stock funds that pay out on the Mar/Jun/Sep/Dec schedule, so this increase reflects that.

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

With total income of $6,154 so far this year, I’m 25% ahead of last September’s total ($4,907). I’m also beating the cumulative total reached in November last year and I should comfortably meet my target goal of $7,800.

Income breakdown

The chart below shows a breakdown of the $1,432 I received this month.

Individual stocks contributed $194.81 or 14% of the total this month. The two Stock funds (VDHYX and VIHAX) paid a total of $947 (66%). The two bond funds (VWEAX and VWESX) paid a total of $286 or 26%. Finally interest from the Income Fund cash reserves made up the remaining $4; it’s a very small percentage (0.26%) which was rounded to 0%.

Dividend income from stocks

20 stocks paid dividends this month as detailed below.

Last September my individual stocks paid $167.11 from 23 stocks. Since then, I’ve sold two holdings (VDE & BBL) and UPS who were listed this time last year, paid their dividend last month. I also sold my NHC shares in August but still received a final dividend payment since the sale was after the dividend record date.

Despite the above sales, I also purchased $3,525 of PFE, LB, MCD, TROW and QCOM over the last year. Overall my total cost basis of stocks paying dividends this month has increased by $1,888 to $20,698 during the last 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 paying dividends this month have increased by nearly 9% over the last year. MSFT, LB, HD and MAR have the highest dividend increases with at least 15%. UNP, EMR, CVX and WMT have the lowest dividend growth at 2% or below.

Income from funds

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

Fund Income ($) TTM Div Growth(%)
High Dividend Yield (VHDYX) 622.08 1.38
International High Dividend Yield (VIHAX) 325.22
High-Yield Corporate Bonds (VWEAX) 245.25 -3.84
Long-Term Investment-Grade Bonds (VWESX) 40.74 -2.32

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 by $11 this month compared to last month. Together both bond funds had a total of $41 more income at this time last year compared to this year. Despite the decrease they still pay a good yield (4+%), tend to move in opposite directions to the stock fund price and should provide additional income when interest rates rise.

Asset Allocation

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

Compared to last month, the US stock fund allocation increased from 36% to 37%, International increased from 18% to 19% and Cash decreased to 3%. Overall the Income Fund is at a 71:29 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 16.0% currently, down from 16.2% last month), 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 (~ 0.3% a month) as I direct new money into stocks.

Fund Purchases & Sales

I added $2,480 of new money to my Income 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.

Fund purchases
I have an automatic monthly $1,800 purchase of VHDYX ($1,400) and VIHAX ($400) set up. This automatically makes purchases using fund Cash at the beginning of the month.

I used the proceeds from the sale of NHC to buy $1,116.40 of VHDYX. I also exchanged a further $2,080 from fund Cash into $1,680 of VHDYX and $400 of VIHAX.

Stock purchases
I bought some individual shares this month: $1,204.45 of LMT.

Distributions
I transferred $540 from Fund Cash into my Living Expense account. This is an automatic payment and represents about 13% of my Living Expenses that my Fund pays every month.

Portfolio Performance

My Income Fund increased in value from $260,805 to $263,023 this month, a new record high, helped mostly by the $2,480 of new capital that I added.

The new capital ‘purchased’ 23.593 shares of my Income Fund and the end of month share price decreased by $0.11 to $106.0922. This represents a monthly decrease of 0.11%.

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%
Aug-16 106.2081 0.03% 6.21% 260,804.54 245,759.16 8.74%
Sep-16 106.0922 -0.11% 6.09% 263.023.09 248,239.16 8.38%

I’ve been tracking my fund performance like an Index Fund since the beginning of the year and the underlying monthly investment performance in September was –0.11%. I’m comparing this price performance to VTSAX which decreased -0.33% in June, excluding dividends. My Year to date increase is 6.09%, compared to 8.38% for VTSAX.

The growth percentages only reflect price changes, not total return. Total Return is higher since I pay a monthly distribution (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 as well as to the Vanguard Wellington Fund (VWENX) which is a closer asset allocation to my Income Fund. 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, but I may achieve lower volatility because of the bond component. 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 over the long-term.

Outlook

VHDYX continues to fall under its target 2:1 ratio with respect to VIHAX so I’ll buy proportionately more VHDYX in October 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.

Starting next month (October) I’ve decided to withdraw $600 each month from Fund Cash which goes towards my Living Expenses. This is an increase from my current $540 withdrawal. Although I’m ‘withdrawing’ money, it just means that I can put more of my paycheck towards investing. This is really the same thing (money is fungible after all) but it gives me practice in managing the Fund Cash flows since my paycheck will stop when I retire.

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 still using a little Cash to make additional purchases from time to time but I’m being a bit more careful with supplemental purchases as the cash balance drops.

Due to recent changes in investing law, the money market fund used by my brokerage for Cash (the settlement fund) is changing to VMFXX. This is a less-risky fund with lower interest income (~0.3%) and takes effect in October.

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 September? Are you one step closer to Financial Independence?


Quote of the Day

The secret of getting ahead is getting started.

 

10 thoughts on “September 2016 – Income Fund update”

  1. What an awesome total for the month of September with an equally impressive year over year gain too. Looks like your portfolio is firing on all cylinders as your solid dividend picks continue to pay and raise their dividends. Thanks for sharing.

    1. Hi DivHut,
      Thanks for your support as always! Yes it was a good month and it’s encouraging to see better returns in the 3/6/9/12 months as most of my new investments pay out on those quarters, leaving growth in the other quarters fairly flat.
      Looks like you had a great October too – I’m still writing mine up but it’s down from this time last year so I’m interested to see why 🙂

      Best wishes,
      -DL

    1. Hi IH,
      Thanks! Yes it’s steadily growing and I’m confident on beating my yearly target now.
      Hope you had a great October,
      Best wishes,
      -DL

  2. Morning DL,
    Your cost basis went up quite a bit from your comment. Is that a typo or accurate?
    “Overall my total cost basis of stocks paying dividends this month has increased from $1,888 to $20,698.”
    I keep my buffer in my money market with BoA. I get a rate booster and transfers are pretty instant if I need to buy some stocks.
    Cheers,
    DFG

    1. Hi DFG,
      Ha I wish it’d increased that much! 🙂 I should have made that clearer – I meant that the cost basis of shares paying dividends in Sept 2015 has increased by $1,888 compared to the shares that paid dividends in Sept 2016. I’ve updated the post to try to clarify that.

      Vanguard have a settlement fund where all cash gets put including dividends; they’ve just recently changed the underlying fund due to a Federal law resulting from the 2008 financial crisis. So the interest rate is a little lower than before. I’m trying to limit how much money I keep there so it’s not that big of a deal.

      Hope you had a great October and am looking forward to reading your results!
      Best wishes,
      -DL

  3. I didn’t have nearly as awesome of a month as you did. Plus on top of that making roughly $650 a month in dividend income is incredibly impressive. Keep up the awesome month and I look forward to reading more about your financial journey!!!

    1. Hi MSM,
      It’s not the most tax-efficient investment strategy but it’s still good watching the income roll in and gradually increase every month. Your blog looks great with a lot of varied content so congrats on that!
      Best wishes,
      -DL

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