Income Fund Update for January 2017

income fund report graphicI’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?

Dividend Income

Total income from my Income Fund in January was $300.52, a 1.2% decrease compared to the $304 I received this time last year in January 2016.

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.

Income breakdown

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.

Last January my individual stocks paid $28.61 from 7 stocks. Since then, I’ve sold two holdings (ALB and DOW) as I’ve been simplifying my portfolio and consolidating into the two stock funds.

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.

Fund Income ($)
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.

Asset Allocation

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.

Detailed Allocation

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.

Fund purchases
Total purchases this month were $3,539.90 in VHDYX, $100 in VIHAX and $3,948.23 in VBIIX for a total of $7,588.13.

$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.

Funds sold
None

Stock purchases
None

Stock Sales
I sold my holdings in AWR in early January for $817.32.

Distributions
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
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.

Portfolio Performance

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.

Comparing performance

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.

Outlook

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.

Summary

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.

22 thoughts on “Income Fund Update for January 2017”

    1. Hi Erik,
      I’m thinking I’m going to end up beating $10K this year but I’d rather under-promise and over-deliver 🙂
      Thanks for your support!
      -DL

  1. It sounds like you had a solid month despite the slight increase. I’m impressed by the amount you added to the income fund and that’s sure to help you with reaching that just shy of 10k goal for 2017.

    1. Hi timeinthemarket,
      Yes, I think any month without major surprises is a good month. Things are ticking along and so far are looking good.
      Thanks for your support!
      Best wishes,
      -DL

    1. Hi Dividend Daze,
      Welcome to my blog and thank you for commenting!
      While we’re not completely frugal, we are lucky in that we don’t find the need to spend a lot of money and we’re able to save quite a bit of income.
      Congrats on starting your blog and I look forward to following along on your journey and watching your success.
      Best wishes,
      -DL

    1. Hi ambertree,
      You know I never thought about it that way! I may need to declare Monday’s my Financially Free day – at least it’d help get over that Monday feeling of going to work!
      Thanks for that thought!
      Best wishes,
      -DL

  2. Nice update! I like your 80:20 allocation. I need to look into how to improve my overall diversification. Right now, it’s essentially all stocks plus real estate. No bonds or commodities. In the long-term, that’s not a good thing…

    Don’t mind the lower year-over-year income. That’s just a blip in the long run.

    Cheers!

    1. Hi FerdiS,
      I currently have quite a lot of junk (high-yield) bonds but am working to keep about 10% in higher quality bonds. They provide options for rebalancing or a place to add new money to when the market is high.
      I personally don’t invest in REITs at the moment as I’m happy with just stocks & bonds, but they certainly provide additional diversification to a portfolio and a reasonable income stream too.
      Hopefully March will more than make up for the blip – the way time is flying, I’ll soon be finding out!
      Best wishes,
      -DL

    1. Hi Doug,
      Yes that’s why I don’t plot the year-on-year comparisons and use the cumulative amounts instead. There’s quite a bit of variation in dividend payment schedules not to mention my own portfolio tweaks that affect the monthly values.
      Best wishes,
      -DL

  3. Still, a nice showing for the month of January despite relatively flat performance from last year. You are still “working” on your portfolio with some selling and new buying so that may throw off a particular month of dividend income. You seem to be holding a lot of solid dividend paying stocks coupled with various funds. Definitely well diversified.

    1. Hi DivHut,
      I hope to be done with the adjusting the allocation this year but I’m happy with the way things are progressing so far.
      Thanks for stopping by – I always appreciate your feedback!
      Best wishes,
      -DL

  4. Hey!

    Just curious to see if you still feel confident with WMT? I’ve decided to sell that stock because I didn’t believe in its future growth (in general) anymore. What are your thoughts on it?

    Cheers,

    Mike

    1. Hi Mike,
      Great question! I expect future growth in Walmart to be very low for the next few years, and current growth is slow as can be seen just from the low dividend increase percentage. Some of this is just from the sheer scale of WMT, but it hasn’t done very well in building up Walmart.com as a competitor to Amazon. Given Walmart’s existing scale, logistics network and number of local stores, I’d think that building out the online market is an easier task than for Amazon to build out brick and mortar locations. So in the longer term I’m still confident in WMT holding its own against other brick and mortar retailers and becoming a better Amazon competitor. Amazon is likely a better investment than Walmart as a whole right now because it is more diversified in areas other than just shopping. I’m more focused on income though, so I like Walmart’s dividend policy / yield and I think the dividend is safe for a while although increases will be minimal.
      I can definitely understand why you sold WMT and I think you can find better growth elsewhere. My current position is only 10 shares at ~ $700 so I’m not very exposed to poor company performance at the moment. I’m not planning to buy more currently, but that goes for any individual stocks as I’m reducing my overall allocation.
      Best wishes,
      -DL

  5. Hi DL,
    My condolences, given the occassion of your trip to the UK.
    Regarding the dividend start to the year, you remain on a great trajectory. Given the y scale on your chart, the variations for January are hardly visible anyways.
    Loved the 1 day a week free day above!
    Great achievement!!!
    Regards,
    DIB

    1. Hi DIB,
      Thank you – it was a good trip despite the funeral as my dad celebrated his birthday while I was there too.
      You’re right about the January results barely showing a difference from last year. I’m hoping February will give similar results to January and that March will comfortably beat last year’s income, so overall the first quarter income should be better. We’ll see though.
      Yes one free day a week is an awesome way of looking at it 🙂
      Thanks for stopping by!
      Best wishes,
      -DL

  6. Awesome job! Love the progress despite it being slightly lower than last month. I think that may happen to me in February. Keep rocking,

    Passive Income Dude

    1. Hi Dan,
      The most important thing is the longer term trend so a couple of lower income months isn’t a real problem. They’re mostly of my own making due to my portfolio tweaking.
      Best wishes,
      -DL

    1. Hi DFG,
      Thank you! Looking forward to reading your updates. I’m trying to speed up my asset re-allocation to get back to a more regular investing pattern.
      Best wishes,
      -DL

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