Income Fund Update for February 2017

income fund report graphicThe last few weeks have passed so quickly – it’s hard to believe that winter is nearly gone and Spring is just around the corner. Which means it’s time to post another monthly update and describe my Income Fund update for February 2017.

Dividend Income

Total income from my Income Fund in February was $351.55, a 5% decrease compared to the $378.94I received this time last year in February 2016.

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

Currently, my income so far this year is about $30 behind what it was at the end of February 2016.

Income breakdown

The chart below shows a breakdown of the income this month.

Most of the income this month was from the two Vanguard bond funds that pay out monthly distributions. Together they paid $256 or 73% of the total.

Individual stocks contributed $95 or 27% of the total this month.

Finally, interest from the Income Fund cash reserves made up the remaining $0.79; it’s a very small percentage (0.2%) which was rounded to 0%.

Dividend income from stocks

Eight stocks paid dividends this month as detailed below for a total of $94.80. That’s a 2% decrease over this time last year.

Last February my individual stocks paid $97 from nine stocks. Since then, I’ve sold one holding (APD) as I’ve been simplifying my portfolio and consolidating into the two stock funds.

Despite the sale, the total value of stocks paying dividends in February increased by $509 to $11,400 over the year. I have not bought any new shares in these companies over the last twelve months.

Dividends this month increased by an average of 5% over the last year all on their own. RTN, AXP and GIS had the biggest increases over 7%. PG and VZ had the lowest dividend growth, both coming in under 2%.

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) 213.48
IT Investment-Grade Bonds (VBIIX) 42.48

The High Yield Bond Fund (VWEAX) was the main contributor with $213, down from $233 last February. I sold some VWEAX in December last year when I adjusted my asset allocation.

This time last year, I had significantly higher cash (about $36,000) in my Income Fund which provided $8 in interest. I was also holding VWESX, a Long-Term bond fund which had a higher yield. Together they paid $48.

In switching to the more stable Intermediate Term Bond Fund (VBIIX) for my Emergency Fund strategy late last year, I’m earning less income – $43 vs $48. Although income is lower, it allowed me to put more total money into my Income Fund since I no longer have a separate Emergency Fund account.

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 February 2017 is shown below.

Compared to last month, Individual Stocks decreased from 15% to 13%. High-Yield Bonds decreased two percent to 17%, both US and International stock funds decreased 1%.

The decreases were caused because I added a large amount of my former Emergency Fund into Intermediate-Term bonds. This increased the IT bond allocation by seven percent from 3% to 10%. Cash is virtually zero as I just have a small amount left to manage cash-flow.

Overall the Income Fund is at a 78:22 Stocks:Bonds allocation (counting cash as bonds) which is close to my overall target of 80:20.

Detailed Allocation

The following table shows the details plus my 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.

I’m still under-allocated to VHDYX, so the majority of new money is going towards that.

Fund Purchases & Sales

I added $39,398.23 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 $150 from my monthly income.

$21,948.23 came from my former Emergency Fund account. I decided to speed up the conversion this month. The remaining $15,000 was transferred in from the bonus salary I received.

Fund purchases
Total purchases this month were $12,600 in VHDYX, $5,100in VIHAX and $22,698.23 in VBIIX for a total of $40,398.23.

$1,000 of the purchases were bought using existing Fund Cash.

Funds sold
None

Stock purchases
None

Stock Sales
None.

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.

The distribution allows me to invest $700 more of my salary than I otherwise would, but it gives me experience in managing cash-flow from the Income Fund. One day I won’t have a salary after all.

Fund Cash
Fund Cash is now at $1,922.98 which is all reserved for future distributions, a sub-account which is being filled by dividend income. Cash has decreased by $1,375.38 since last month.

Portfolio Performance

My Income Fund increased in value from $291,833 to $337,959 this month, a new record high. This includes $39,398 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 February was 2.22%. The new capital ‘purchased’ 354,5379 new shares and the end of month share price increased by $2.4228 to $111.7110.

I compare this price performance to the Vanguard Wellington Fund (VWENX) which increased 2.67% in February, 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 11.71%, compared to 10.01% 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. I haven’t had time to include this calculation yet.

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.

I include this comparison just for fun as it puts a boundary on the results to put them into perspective. VTSAX, being a total stock market fund, should have better performance over the long term since bonds, having a lower expected return act as a drag but also smooth out some highs and lows.

Outlook

As I mentioned above, I decided to speed up the conversion of my former Emergency Fund cash into my Income Fund. I’ll be completing the rest of the conversion this month, in order to simplify monthly management of my accounts. The value of having a simple portfolio seems to increase for me every month.

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’ve resisted selling any so far in favor of trying to meet my allocation with new money, but I may choose to sell one or two smaller positions to get there faster.

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

I was expecting another month of lower income since I’ve moved from a higher yield bond fund into a lower yielding one.

On the plus side, most of the new money I’ve invested has gone into the two stock funds which pay out in March. I expect that March income should be proportionately higher and put me back on track.

Also at the end of March, I’ll have a better idea of my new income and if I’ll be able to invest more money each month. I’m currently going to withhold more taxes and pay more into my 401k. I’m not sure what impact those changes will have on my paycheck at the moment.

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


Quote of the Day

Knowing others is wisdom, knowing yourself is Enlightenment.

16 thoughts on “Income Fund Update for February 2017”

  1. Great month for you! Was the $30 shortfall compared to last year due to timing of dividends paid out? It seemed all of variables pointed towards it going up!

    Sounds like March will be a nice payout. Looking forward to the next update!

    1. Hey Erik,
      The shortfall is partly because I sold some stock (APD and VWESX) that pay dividends in February – the money was invested in VHDYX which pays in March. And partly because of the bond funds I hold, now that I’ve moved money into a more stable fund that has a lower yield. I think that normal upward progress will be resumed this month and I’m looking forward to seeing the numbers too!
      Thanks for your support!
      Best wishes,
      -DL

    1. Hi BHL,
      Thank you. I’m looking to beat my targets quite comfortably this year. I’m looking forward to sitting back and enjoying the ride.
      Best wishes,
      -DL

  2. Ciao DL,
    It seems that the transition that you are making is almost painless, 30 dollars are nothing after all. Can I ask you why the 80:20 allocation? In the past with bonds being more “stable” I remember that it was fashionable to allocate the investor’s age in bond, and the rest in stocks. Nowadays I see bonds much more dangerous than before, they are very expensive and with rising interest rates they can be a bit of trap. I am very attracted to them (want to start studying some USD T-bills after March hike), but they are not as safe as they used to be before (at least this is my feeling towards them).
    Apart from that it seems that the yearly target that you set up it’s well within reach!
    Ciao ciao
    Stal

    1. Hi Stal,
      Yes it’s true that it’s not the best environment for bonds, but then you never know what might happen to the market too. Holding some bonds provides some flexibility in the case of a large correction, where I might be able to rebalance in favor of stocks. While prices might fall because of the higher interest rates, the yield increases too.
      The 80:20 allocation is not quite as aggressive as a 100% stock portfolio, but should come close to the same return with a little less volatility.
      The more stable the fixed income, the better really. I’m trying to wean off the High Yield bonds so I’ve not bought any for a while (they’ve gone up since the start of the year) and I may gradually reduce that particular allocation since they act more like stocks. But right now, I’m good with 10% HY, 10% Int. Term and the rest in Stocks.
      Best wishes,
      -DL

  3. Hey no worries about the decline! I just reported a 70% decrease for February, so I would’ve taken 5% ANY DAY. 🙂

    Congrats on the incredible amount of new capital added. That’s great. Take care,

    Passive Income Dude

    1. Hi Dan,
      Sorry to hear about your 70% decline. At least it’s from portfolio changes rather than cut dividends so although it might be one step backwards, hopefully there will be two steps forward this month to catch back up.
      To be honest, I prefer looking at the cumulative year totals rather than month to month or year on year results. Even if there’s no selling activity in a portfolio, there’s usually enough schedule payment changes to ‘mess up’ the numbers.
      Best wishes,
      -DL

  4. Even with the sale of APD you brought in a very nice amount of passive income from your portfolio. You have one of the few portfolios that I have seen online that offers a pretty diverse mix of stocks and funds. Most, like mine, are just pure individual stocks. Thanks for sharing your February summary. Keep up the good work and the addition of those fresh funds.

    1. Hi DivHut,
      The loss of APD income was almost made up by the increased dividend payments from the remaining individual stocks which was pretty cool. Not quite but close.
      I do find it interesting that there are a lot of 100% stock portfolios. I personally think that a small percentage of bonds provides some more flexibility for potential rebalancing opportunities, but at 20% it’s not a big drag on performance.
      Thanks for your support as always – looking forward to reading your monthly update.
      Best wishes,
      -DL

    1. Hi IH,
      Yes I’m hoping for bigger increases this month so I’m excited to see how the month ends.
      Thanks for your support!
      Best wishes,
      -DL

  5. There may have been a decrease; however, the amount of capital that you deployed this month was INCREDIBLE! That’s how you set yourself up for future dividend increases right there. Amazing, amazing, stuff Dividend Life. Keep it up!

    Bert

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