December 2017 Income Fund Update (!)

November 2017 income fund update report graphicAlrighty I’ve finally reached the end of the year! Here’s a look back to last year’s December 2017 Income Fund update, following on from my November update.

Dividend Income

Total income from my Income Fund this month was $2,697, a 46% increase compared to the $1,838 I received in December 2016. This is the highest income ever, just beating out $2,673 from June 2017.

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

So I beat my 2017 target of $9,925 this year by quite a bit! 🙂 I think that deserves an exclamation mark at least.

The increases for the last quarter are different from the first three quarters because I’ve eliminated all monthly-paying bond dividends. So most of the increases show up in the last month of the quarter thanks to the distributions of low-cost index funds.

Income breakdown

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

The largest contribution came from my index fund holdings – together they paid 81% or $2,458.

Individual stocks contributed $238 or 9% as most of my individual stocks pay out in the third month of the quarter.

Finally, interest from the Income Fund cash reserves made up the remaining $1.40; I keep a little cash aside to smooth out ‘withdrawals’.

Dividend income from stocks

18 stocks paid dividends this month as detailed below for a total of $238.11.

Last December my individual stocks paid $216.13 from nineteen stocks. Since then, I’ve sold out of TROW and AWR and put the proceeds into VHDYX instead. I’ve also added DAL plus  $800 in LB and $400 in INTC.

Dividends increased by a simple average of over 2.5% over last year all on their own. DAL and HD had the biggest increase with 50% and 29% respectively. EMR, CVX had increases under 2% and LB held their dividend constant.

Income from funds

Fund Income ($)
High Dividend Yield (VHDYX) 1,361.15
International High Dividend Yield (VIHAX) 711.09
Total Stock Market (VTSAX) 385.42

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.

None of the funds paid out capital gains in December.

Asset Allocation

My Income Fund asset allocation is shown below.

I’m now holding 100% stocks in my Income Fund which is held entirely in Taxable accounts. This is a much more tax efficient than before when I was holding bonds.

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.

Individual and International stocks (VIHAX) are a little over my target and US Total Stock is a little under. I’m not that worried about getting them exactly in line; I’m just putting a bit more money to the under-target assets each month.

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 $2,850 of new money to my Income Fund in December. $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 $550 which was left over from my salary after paying living expenses and savings.

Fund purchases

Total purchases this month were $300 in VIHAX, $2,450 in VHDYX and $300 in VTSAX which included using $200 of Fund Cash.

I continued to ignore my target asset allocation in December.  Reaching for higher yield is too tempting – bad DL!

Funds sold

None.

Stock purchases

None.

Stock Sales

None.

Distributions

I transferred $825 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 $825 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 $2,834 and held in the VMFXX money market account which is where all dividend distributions are paid into. $2,726 of this is reserved for future distributions of $850 a month.

Cash has increased by $1,672 since last month due to the dividend income less the $825 withdrawal and $200 of purchases. $107.29 remains uninvested.

Portfolio Performance

My Income Fund increased in value from $412,246 to $420,903 this month, a new record high. This increase of $8,656 includes $2,850 of new capital.

Outlook

Starting next year I’m going to increase my monthly cash withdrawal to $850. This money pays some living expenses and allows me to invest more of my paycheck.

Improved tax efficiency

As a result of clearing out all bonds in my Income Fund, it’s now more tax efficient since the majority of distributions are now taxed at the 15% Qualified Dividend rate. Previously the bond income was taxed at my marginal rate of 28%. This doesn’t show up during the year but I’ll be paying it in this year’s tax filing.

I’m also moving slightly away from VHDYX with a 25% allocation to the more efficient VTSAX.

Both of these changes have lowered the overall yield of the portfolio however.

Shifting focus

If I receive a bonus next year, I’ll put some of it towards a new position in Vanguard’s Total international Fund (VTIAX) and stop funding VIHAX. This will possibly be around March next year.

Ultimately I will move towards a total market portfolio with a small tilt to high-yield (value) plus some individual stocks.

Simplification

I also plan on consolidating my stocks currently held at Capital One (now E-Trade) over to my main brokerage at Vanguard, where I have lower trading fees. This will be a transfer in-kind, although some of the partial shares will be liquidated.

The move will eliminate some cash transfers that I currently need to make and help with tax filing.

Summary

My 2017 goal of $9,925 is well and truly beaten and it’s nice to end 2017 with some good news! Although this is largely due to a very conservative target in the first place. I’ve taken the first steps to improve the tax efficiency of my portfolio which is held in taxable accounts.

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


Quote of the Day

It is a terrible thing to see and have no vision.

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