October 2016 – Income Fund update

It’s time for my October 2016 Income Fund update. The end of the month ended on a downturn because of fears about the election (and likely many other reasons) so let’s see how the portfolio fared.

Dividend Income

Total income from my Income Fund in October was $327, a 4.6% decrease compared to the $343 I received this time last year in October 2015. The decrease is from selling stocks that happened to pay dividends in October in favor of VHDYX which pays dividends in September and December. Hence I had better performance last month at the cost of lower income this month.

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

This month’s decrease didn’t have a significant impact in the bigger picture. With total income of $6,473 so far this year, I’m 23% ahead of last October’s total ($5,249). With only two months of income left this year, I’m relying on a large December payment to beat my target of $7,800.

Income breakdown

The chart below shows a breakdown of the $327 I received this month.

Individual stocks contributed $32.98 or 10% of the total this month. The two bond funds (VWEAX and VWESX) paid a total of $292 or 89%. Finally interest from the Income Fund cash reserves made up the remaining $2; it’s a very small percentage (0.6%) which was rounded to 1%.

Dividend income from stocks

5 stocks paid dividends this month as detailed below.

Last October my individual stocks paid $46.89 from 9 stocks. Since then, I’ve sold four holdings: (VPU, DOW, ALB & DEO) as I’ve been simplifying my portfolio and consolidating into VHDYX. In addition, CB were acquired by ACE and the number of shares and cost basis changed as a result.

Despite the above sales, I also purchased $1,201 of JPM over the last year. Overall the total cost basis of stocks that pay dividends in October has decreased by $1,204 to $3,922 over the 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. CB and JPM both had double-digit increases. KMB had the lowest dividend growth at 5% or below.

Income from funds

I received income from the two Vanguard Bond funds which pay monthly distributions this month as shown below.

Fund Income ($) TTM Div Growth(%)
High-Yield Corporate Bonds (VWEAX) 249.83 -3.84
Long-Term Investment-Grade Bonds (VWESX) 42.01 -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 increased by $5 this month compared to last month. Together both bond funds had a total of $40 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 October 2016.

Compared to last month, the US stock fund allocation increased from 37% to 38% and Cash decreased to 2%. Overall the Income Fund is at a 72:28 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 as I direct new money into stocks.

Fund Purchases & Sales

I added $2,860 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 also exchanged $2,002.36 of Fund Cash to buy $1,828.36 of VHDYX and $174 of VIHAX.

I sold $166.33 of LMT this month to consolidate my LMT shares in one brokerage.

Stock purchases
I bought additional shares in both LMT and INTC this month for a total of $1,891.71.

Distributions
I transferred $600 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.

Fund Cash

Fund Cash is now at $4,777.74 with $1,772.70 of that put aside for distributions which is being filled by dividend income. I plan to cap it at $1,800 which covers the distribution from one quarter year.

Cash has decreased $2,993.68 since last month with $3,005.04 available for new purchases. The decrease is despite the $2,860 of new cash added, so total purchases were $5,694.07 ($3,228.36 in VHDYX, $574 in VIHAX and $1,891.71 in individual stocks).

Portfolio Performance

My Income Fund decreased in value from $263,023 to $262,889 this month, down slightly from its prior record high, despite $2,860 of new capital being added.

The new capital ‘purchased’ 27.254 shares of my Income Fund and the end of month share price decreased by $1.2072 to $104.8850. This represents a monthly decrease of 1.14%.

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%
Oct-16 104.8850 -1.14% 4.89% 262,888.72 251,099.16 5.98%

I’ve been tracking my fund performance like an Index Fund since the beginning of the year and the underlying monthly investment performance in October was –1.14%. I’m comparing this price performance to VTSAX which decreased -2.21% in October, excluding dividends. My Year to date increase is 4.89%, compared to 5.98% 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.

This month I overtook the Wellington Fund and you can see the lower volatility effect that bonds have on the price – the stock fund is more volatile than both my Income Fund and the Wellington Fund but also has better performance.

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 November 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’ve been reviewing the benefits of keeping bond funds as part of my Income Fund and should have some data to post later this month. In general, I’m inclined to go with a 100% stock asset allocation but a sudden switch out of the bond funds would mean lower income.

Summary

I think it’s been a pretty solid month all in all and I’m one step closer to FI although it still looks very far away. October will be the third lowest income month of the year, after January and July. However I’m on track to easily reach $8,000 dividend income this year and beat my goal of $7,800.

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


Quote of the Day

The secret of getting ahead is getting started.

 

3 thoughts on “October 2016 – Income Fund update”

  1. Awesome stuff DL. Even though there was a slight decrease year over year at least there’s a valid explanation for it and that’s still a hefty total. Also, $8k in dividends for the year is fantastic. Especially since you’re blowing past your goal. Keep up the good work.

    1. Hi timeinthemarket,
      The HY bonds are in taxable which is an irrational behavior of mine that I’ve rationalized away for too long now. I treat my tax-advantaged accounts entirely separately with passive income funds – so I’ve always justified holding bonds for income in taxable as no different than the taxes I’d pay on ordinary interest from a savings account. I’ll be writing more about that in a post later this month.

      It looks like you had a great November update, so congrats on that!

      Best wishes,
      -DL

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