September 2017 Income Fund Update

September 2017 income fund update report graphicI’m behind on posting updates on my Income Fund, so here’s a look back to last year’s September Income Fund update, following on from my August update.

Dividend Income

Total income from my Income Fund in September was $2,534, a 77% increase compared to the $1,432 I received in September 2016.

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

This month’s results put me ahead of the 2016’s yearly total, but there’s still a little way to go to my 2017 target of $9,925.

The big increase this month mostly results from a switch in my asset allocation – the higher dividends this month will be offset by lower dividends in October and November.

Income breakdown

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

I made significant changes to my Income Fund in September, selling all of the bond funds I held in my Taxable account, and buying stock funds with the proceeds. I also added a Total (US) Stock Market fund (VTSAX).

The Bond income of $51 shown is pro-rated income from the beginning of the month until I sold the shares.

Individual stocks contributed $211 or 8%. The majority of my individual stocks pay dividends in September so this is higher than normal.

Likewise with the stock funds, which combined paid 62% ($1561) from US stocks and 27% ($697) from US stocks.

Finally, interest from the Income Fund cash reserves made up the remaining $14; it was higher than normal because it held cash from the Bond fund sales for a short time .

Dividend income from stocks

18 stocks paid dividends this month as detailed below for a total of $211.

Last September my individual stocks paid $195 from 20 stocks. Since then, I’ve sold out of NHC and TROW and put the proceeds into VHDYX instead.

Dividends this month increased by a simple average of 9% over the last year all on their own, although the average is distorted by DAL and HD’s increases. DAL and HD had the biggest increases with 50% and 29% respectively. LB, EMR, CVX and WMT all did poorly with dividend growth of under 3%.

Income from funds

I received income from five Vanguard funds in my portfolio this month.

Fund Income ($)
High Dividend Yield (VHDYX) 1,254.61
International High Dividend Yield (VIHAX) 696.67
Total Stock Market (VTSAX) 306.06
High-Yield Corporate (VWEAX) (now sold) 38.04
IT Investment-Grade Bonds (VBILX) (now sold) 13.40

VHDYX, VTSAX and VIHAX pay out on a quarterly schedule (March, June, September and December). VIHAX being an international fund has a tendency to pay higher dividends in June and December as some international companies pay on an annual or bi-annual basis. Distributions from both funds are usually qualified which means they are taxed at the lower 15% dividend rate.

Asset Allocation

My Income Fund asset allocation as of September 2017 is shown below.

I’m now holding 100% stocks in my  Income Fund which is held entirely in Taxable accounts.

All Bonds are now held in my Tax-advantaged retirement accounts and there is sufficient space that I don’t need to hold any bonds in my taxable accounts. I’m not including my retirement accounts as part of my Income Fund report, and will write separately about my overall allocation.

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

Detailed Allocation

The following table shows the details plus the new asset allocation for my Income Fund.

I still believe that individual stocks are too risky to hold as a high-percentage of my portfolio, so I continue to limit them to around 10%.

The move out of bonds was to improve the tax-efficiency of the portfolio. If I don’t really need income now in the accumulation stage, then why hold bonds paying higher-taxed dividends in my taxable accounts. Likewise, why hold higher dividend-yielding funds when VTSAX is much more tax efficient and is likely to perform better in the long-term.

So I ended up with a target allocation of 25% to VTSAX as a move towards tax efficiency. I’m keeping international exposure to around 20%, 10% in individual stocks which leaves 45% for VHDYX.

Changing allocation ratio via new capital takes a lot of time because of the size of my contributions vs the total value, so I’m not in a particular hurry to meet these targets. I won’t be selling any assets to re-balance faster unless there’s really a big opportunity for tax-loss harvesting.

Fund Purchases & Sales

I added $2,815 of new money to my Income Fund in September. $2,300 of this was the standard contribution I make from my salary. I’m confident this amount is at least always left over after paying for Savings and Living Expenses. I also added a further $515.04 which was left over from my salary after paying living expenses and savings.

Fund purchases

Total purchases this month were $3,910 in VHDYX, $17,163 in VIHAX and $70,624 in VTSAX for a total of $91,697.

Funds sold

I sold $51,837 of VWEAX for a capital loss of $816 and $38,051 in VBILX for a capital gain of $800.

Stock purchases

I bought 10 shares of DAL on 9/14 for $491 and another 10 shares on 9/25 for $486.20. I think Delta is a well-managed company and this was really just an irrational / loyalty purchase since I’m in their frequent flyer program.

Stock Sales

None.

Distributions
I transferred $800 from Fund Cash into my Living Expense account. This is an automatic payment and represents about 20% of my Living Expenses that my Fund pays every month.

Money is fungible, so a dollar in one account is no different than a dollar in another account. The distribution from the income fund allows me to invest $800 more of my salary than I otherwise would be able to. Withdrawing money 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 $3,607. $2,475 of this is reserved for future distributions of $825 a month in a sub-account which is being filled by dividend income.

The remaining $1,132 is un-invested, and will be fixed in October.

Cash has increased by $2,083 since last month since incoming dividends this month are so high. I keep three times the monthly withdrawal in reserve at the start of the next quarter to smooth out the uneven payments.

Portfolio Performance

My Income Fund increased in value from $379,408 to $391,316 this month, a new record high. This increase includes $2,815 of new capital.

Outlook

I’m increasing monthly ‘withdrawals’ slightly to $825 a month for October through December. These withdrawals pay some of my monthly bills allowing more of paycheck to be invested.

Beating my 2017 goal of $9,925 income this year is guaranteed since I’m so close, although income in October and November will be very small because there will be no more monthly bond income. The final FI destination is still looking far away however.

Summary

September represented a big shake-up in my Income Allocation in a move towards being more tax-efficient. Income as a whole might be a little lower going forward because the stocks replacing the bonds have lower yields. But I believe this was the correct move to make.

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


Quote of the Day

Optimism is the faith that leads to achievement. Nothing can be done without hope and confidence.

5 thoughts on “September 2017 Income Fund Update”

  1. Love your portfolio. We own similar mutual funds. I don’t own the high yield international fund. I thought there was some purchase fee? 0.75%. Instead it might be useful to own VYMI. I own the rest. In additional I also own VIG. Instead of bonds, I use cash to give me diversification.

    1. Hi dividendgeek,
      Yes that’s a good point. It’s cheaper to own the ETF version (VYMI) of VIHAX – there is a 0.25% purchase / redemption fee on the mutual fund, which didn’t exist when I originally purchased the fund. To be honest though, I really just stick with mutual funds over ETFs because I like the automatic / recurring purchase options.

      I haven’t added much International since September and my plans at the moment are to add a new position in VTIAX (total international), probably in March. I’ll just leave the VIHAX position alone for now. VTIAX is cheaper and more tax-efficient and will likely out-perform VIHAX in the long run.

      Thanks for stopping by!
      Best wishes,
      -DL

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