Income Fund Update for March 2017

income fund report graphicI moved the remaining cash from my old Emergency Fund into my Income Fund in March. A bit like tearing off a Band-Aid; getting it done in one go instead of dragging it out was easiest and will likely make little difference in the long-term. So now that the dust has settled, it’s time to describe my Income Fund update for March 2017.

Dividend Income

Total income from my Income Fund in March was $1,923.06, a 99% increase compared to the $964.52 I received this time last year in March 2016. So, that’s pretty good really!

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

With this month’s increase, the total to date this year in March already exceeds the amount from May last year.

Income breakdown

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

Most of the income this month was from the two Vanguard stock funds that pay out distributions in March. Together they paid $1,390 or 72% of the total.

Individual stocks contributed $212 or 11% of the total this month.

Finally, interest from the Income Fund cash reserves made up the remaining $3; it’s a very small percentage (0.15%) which was rounded to 0% in the chart above.

Dividend income from stocks

Eighteen stocks paid dividends this month as detailed below for a total of $212. That’s a 10% decrease over this time last year as I’ve sold several positions since then.

Last March my individual stocks paid $237 from 23 stocks. Since then, I’ve sold five positions (VPU, VDE, AWR, GXP and BBL) as I’ve been simplifying my portfolio and consolidating into the two stock funds. So although the individual stock income has declined, the re-allocation has increased the stock fund payment this month instead.

Dividends this month increased by a simple average of 9.5% over the last year all on their own. MSFT, LB, LMT , HD, MAR and QCOM had the biggest increases over 10%. EMR and CVX 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 all four Vanguard funds in my portfolio this month.

Fund Income ($)
High Dividend Yield (VHDYX) 1,007.07
International High Dividend Yield (VIHAX) 383.51
High-Yield Corporate Bonds (VWEAX) 239.21
IT Investment-Grade Bonds (VBILX) 78.05

High Dividend Yield (VHDYX was the main contributor this month, as it makes up nearly half of my Income Fund. Last March, it paid $373.

The dividend amount was additionally helped by new shares purchased from some of my former Emergency Fund cash at the beginning of the month which was in time to qualify for March’s dividend. Note: Normally in a Taxable account you want to avoid ‘buying the dividend’ as I did and buy shares on the ex-dividend date when the price drops since I’ve incurred taxes as a result.

The High Yield Bond Fund (VWEAX) was a pretty solid contributor with $239, down from $241 last March. I sold some VWEAX in December last year when I adjusted my asset allocation.

This time last year, I had significantly higher cash (about $32,000) in my Income Fund which provided $12 in interest. I was also holding VWESX, a Long-Term bond fund which had a higher yield. Together they paid $54.

In switching to the more stable Intermediate Term Bond Fund (VBILX) for my Emergency Fund strategy late last year, I’m earning a little more income – $78 this month vs $54. This is because the bond yield is higher than the cash interest yield I was getting previously.

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 March 2017 is shown below.

Compared to last month, the US Stock Fund increased one percent to 42% and High-Yield Bonds decreased one percent to 14%.

So not too much drama on the allocation front, but mostly because in converting the remaining Emergency Fund cash, I kept the IT Bond allocation at 10%. This meant that I ended up buying more VHDYX as a result since I didn’t convert all of the cash to bonds.

Cash is virtually zero as I just have a small amount left to manage cash-flow.

Overall the Income Fund is at a 75:25 Stocks:Bonds allocation (counting cash as bonds) which is closing on 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 $16,135.38 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 $200 from my monthly income.

$13,635.38 came from my former Emergency Fund account which is now at zero.

Fund purchases
Total purchases this month were $11,853.83 in VHDYX, $1,190.83 in VIHAX and $2,590.72 in VBILX for a total of $15,635.38.

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 $3,493.52 most of which ($3,006.59) is reserved for future distributions, a sub-account which is being filled by dividend income. The remainder ($485.13) wasn’t invested yet.

Cash has increased by $1,570.54 since last month.

Portfolio Performance

My Income Fund increased in value from $337,959 to $354,661 this month, a new record high. This increase includes $16,135 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 March was 0.17%. The new capital ‘purchased’ 144.0781 new shares and the end of month share price increased by $0.1912 to $111.9023.

I compare this price performance to the Vanguard Wellington Fund (VWENX) which decreased 0.79% in March, 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 11.90%, compared to 9.14% 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 gained a little 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 a result of the higher income level, starting next month I’ll be ‘withdrawing’ $800 a month towards my living expenses. In reality, this just means I get to invest an extra $100 of my salary. But it’s encouraging to see this amount increase as I think it should be a fairly sustainable amount.

$800 is $9,600 a year which represents 2.7% of my total Income Fund. I’m continuing to invest monthly so total dividend income should continue to increase.

I’m still 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 remain confident of beating my 2017 goal of $9,925 income this year. Although the final FI destination is still looking very far away, I made a significant step forward this month.

Summary

It’s good to see the declining income from the first two months finally turn into a big income boost. I can’t wait until the next one in June now!

Because I decided to maintain a 10% allocation to IT Bonds I didn’t convert all my Emergency Cash into IT Bonds. So my “emergency fund” has shrunk to around 8.5 months of living expenses. I hope to gradually build this number up again as the Income Fund increases in value. I don’t expect to touch these funds however as I have enough Savings to cover large expenses.

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


Quote of the Day

Knowing others is wisdom, knowing yourself is Enlightenment.

8 thoughts on “Income Fund Update for March 2017”

  1. Ciao DL,
    Seems like the boat is going the right direction there, all positive numbers and all. I didn’t understand one point though… the 800 dollars that you will be taking away from the fund to go into the “living expenses” account, how does that translate into an “increase in investment”?
    Ciao ciao
    Stal

    1. Hi Stal,
      Good question! I add $3,970 to my Living Expenses account every month; $3,270 from my paycheck and $700 from my Income Fund. So when the Income Fund withdrawal increases to $800, I contribute $100 less of my paycheck or $3,170. I can then invest the “extra” $100. Financial Independence is reached when $0 of my paycheck goes towards Living Expenses.
      Since money is fungible, it’s not really any different than simply re-investing the income fund money and spending more of my paycheck, but setting up the withdrawal mechanism makes things more real to me and helps me manage cash flow from my portfolio.
      Best wishes,
      -DL

    1. Hi Brian,
      Thanks! I’m not looking to buy any individual stocks for a couple of months as I’m trying to limit how much individual stock I own. (I personally find that owning VHDYX is ‘good enough’ and easier to manage).
      If I was in the market to buy this month, then for me personally I’d definitely be interested in GIS, PFE, XOM and a less typical dividend stock, DAL.
      Thanks for stopping by,
      -DL

    1. Hi Dan,
      Hopefully your rental income will ramp up with the third property generating some rent now. I think that’s pretty cool, especially with a two year lease. And you’ll be done with debt in a couple of months which is fantastic!
      Wishing you all the best in crushing your goals!
      -DL

    1. Hi IH,
      Yes it was definitely a good outcome and I’m looking forward to buying a bit more stock later this year.
      Thanks for your support 🙂
      -DL

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