I’m back in the UK for a couple of days for a funeral. Which tends to put things into perspective, so I’m running behind on updates. With a whole new year ahead of us, this is my first Income Fund update for January 2017. It’s time to answer the question you didn’t know you wanted to ask … how did I do in January?
The following chart shows the cumulative dividend income this year compared to previous years.
This is the first month of 2017 so the total income for the year is also $301 (rounded up). I’m starting this year a little behind.
The chart below shows a breakdown of the income this month.
Most of the money this month was from the two Vanguard bond funds that pay out monthly distributions. Together they paid $267 or 89% of the total.
Individual stocks contributed $32.38 or 11% of the total this month.
Finally, interest from the Income Fund cash reserves made up the remaining $1.04; it’s a very small percentage (0.35%) which was rounded to 0% and not shown in the chart above.
Dividend income from stocks
Five stocks paid dividends this month as detailed below for a total of $32. That’s a 13% increase over this time last year.
Despite the sales, the total cost basis of stocks paying dividends in January increased by $785 to $3,258 over the year. I bought $1,200 of JPM last April which more than offset the sales.
Dividends this month increased by an average of 5.3% over the last year all on their own. JPM and ADP had the biggest increases over 7%. CB and WMT had the lowest dividend growth of 3% and 2% respectively.
I’ve included the dividend growth of each stock on a 1-year trailing basis in the table. The yield calculations are annualized, or extended forward a year, based on the current dividend payment against the market value.
Income from funds
I received income from two of the Vanguard funds in my portfolio this month.
|High-Yield Corporate Bonds (VWEAX)||248.17|
|IT Investment-Grade Bonds (VBIIX)||18.93|
The High Yield Bond Fund (VWEAX) was the main contributor with $248, up from $233 last January.
This increase was offset by the Intermediate Term Bond Fund (VBIIX) which paid out $18.93. This time last year, I owned the Long Term Investment Grade Bond Fund (VWESX) which paid out $42.25, but I changed my Emergency Fund strategy late last year. Aside from a lower yield, I currently own less of the fund as I’m dollar cost averaging my former emergency fund in over this year.
The two bond funds pay their distributions monthly and are taxed as normal income – not the lower qualified dividend rate that dividends receive.
My Income Fund asset allocation as of January 2017 is shown below.
Compared to last month, Individual Stocks decreased from 16% to 15%. High-Yield Bonds decreased one percent to 17% and Intermediate-Term bonds increased one percent to 3%. Cash decreased about 0.4%.
Overall the Income Fund is at a 80:20 Stocks:Bonds allocation (counting cash as bonds) which is at my overall target of 80:20.
The following table shows the details plus my new target asset allocation.
The bond funds are targeted for a combined 20% total weight, with a target 10% in each of the Intermediate-Term and High-Yield funds.
Fund Purchases & Sales
I added $6,278.23 of new money to my Income Fund this month. $2,300 of this was the standard contribution I make from my salary. I also added a further $30 from my monthly income. The remaining $3,948.23 was transferred in from my former Emergency Fund account.
$1,309.90 of the purchases were bought using existing Fund Cash which was supplemented with $817.32 from the sale of my AWR shares.
I sold my holdings in AWR in early January for $817.32.
I transferred $700 from Fund Cash into my Living Expense account. This is an automatic payment and represents about 18% of my Living Expenses that my Fund pays every month.
Fund Cash is now at $3,298.36 with $2,298.36 of that reserved for future distributions, a sub-account which is being filled by dividend income. This leaves $1,000 available for new purchases. Cash has decreased by $806.30 since last month.
My Income Fund increased in value from $284,146 to $291,883 this month, a new record high. This includes $6,278.23 of new capital.
I’ve been tracking my fund performance like an Index Fund since the beginning of the year and the underlying monthly investment performance in January was 0.51%. The new capital ‘purchased’ 57.5556 shares of my Income Fund and the end of month share price increased by $0.5534 to $109.2882.
I compare this price performance to the Vanguard Wellington Fund (VWENX) which increased 0.93% in January, excluding dividends and capital gains. VWENX has a fairly similar stock to bonds ratio as my Income Fund: two-thirds stocks, one-third bonds. My price increase since December 2015 is 9.29%, compared to 7.15% for VWENX.
The growth percentages only reflect price changes, not total return. 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 as well as to VWENX. This data excludes re-invested dividends so it’s a growth of price, not total return. I used Price Return for now as it’s easier to calculate.
This month, my Income Fund lost ground against both the Wellington Fund (VWENX) and Total Stock Market (VTSAX, ). You can see the lower volatility effect that bonds have on the price – the VTSAX stock fund is more volatile than both my Income Fund and the Wellington Fund but also has better performance. See my Portfolio page for more details on the numbers.
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 by doing nothing other than buying more shares. Average doesn’t mean bad in this case – even average performance beats most active stock fund managers over the long-term.
Going forward in 2017, I’ll be adding most new money to VHDYX to meet its target allocation, as well as slowly converting the remainder of my former Emergency Fund (held in a money market account) to the IT Bond fund.
I’m not planning to buy individual stocks for a while. Not because of high valuations or a fear of a correction, but simply because they’re over-allocated in my target allocation. I might choose to speed this process up by selling one or two positions – possibly CB where I have a small position anyway and their yield has fallen quite low.
I am confident of beating my 2017 goal of $9,925 income this year. Although the final destination is still looking very far away, slow and steady wins the race.
It’s always a little disappointing to have less income than the same month last year. This was expected since I’ve moved from a higher yield bond fund into a lower yielding one. Although the overall drop was much less than I’d estimated due to higher income from the other assets.
Most of the new money I’ve invested over last year has gone into mutual funds which pay out in March, June, September and December. So although January’s income is lower, March income should be proportionately higher.
More importantly, I’m starting this year with a 17.5% of my living expenses steadily funded by my Income Fund. Since I use a fixed withdrawal amount, this level won’t change again until the summer when I review my budget and fund withdrawal amount.
How was your January? Are you one step closer to Financial Independence?
Quote of the Day
If you do not change direction, you may end up where you are heading.