May 2019 Income Fund Update

May 2019 income fund update report graphic

Here’s my May 2019 Income Fund update, following on from last month’s April update. Click on for the details…

Dividend Income

Total income from my Income Fund this month was $148, a 46% increase to the $101 that I received in May 2018. The following chart shows the cumulative dividend income this year compared to previous years.

The red bar for the last two months is largely flat since the dividends paid only came from individual stocks which are a small percentage of my Income Fund.

Income breakdown

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

Individual US stocks paid $145 this month. Interest from the Income Fund cash reserves made up the remainder. I keep a little cash aside to smooth out withdrawals and the interest rate on this money market account is above 2%.

Dividend income from stocks

Seven stocks paid dividends this month for a total of $145 as detailed below.

Last May my individual stocks paid $98 from six stocks and so income increased 48% year on year. Since last year I’ve added shares in DAL and I added to my AXP shares by buying 6 shares last December.

The average organic increase was a little over 6% most of the increase coming from the additional shares of DAL. Both DAL and AXP had good dividend increases greater than 10% with GIS and T slacking.

Income from funds

No stock funds that I hold paid out dividends this month. There were no capital gain distributions.

Asset Allocation

My Income Fund asset allocation is shown in the chart below.

I hold 100% stocks in my Income Fund which is held entirely in Taxable accounts. Cash is virtually zero as I just keep a small amount to manage cash-flow.

Detailed Allocation

The following table shows the details.

Individual stocks are a little over my target as usual. International and US stock funds remain a little under. Not enough to worry about however.

Purchases & Sales

I added $2,671 of new money to my Income Fund this month.

Fund purchases

Total purchases this month were $1,568 in VTSAX and $1,500 in VTIAX.

Funds sold

I sold $1,051.38 worth of VIHAX which resulted in a long-term capital loss of $108.62.

Stock purchases

I bought 11 shares of MO for a total of $601.50 on 5/1/19 including a commission of $2. This is a new position for the Income Fund as I slowly increase the number of stocks to a total of 32. I chose MO because it’s a cash generating company with a growth opportunity in newly legalized drugs even as cigarette use in developed worlds is reducing.

At the time of purchase they had a reasonable P/E of 16.28 and a dividend yield of 6.4%. With this purchase DIS remains the lowest paying dividend holding in my Income Fund.

Stock Sales

None.

Distributions

I transferred $1,100 from Fund Cash into my Living Expense account. This is an automatic payment and represents about 25% of my Living Expenses that my Fund pays every month. Money is fungible and so a dollar in one account is no different than a dollar in another account (although an argument can be made that tax-deferred money is different).

The withdrawal from my income fund simply allows me to invest more of my salary than I otherwise would be able to. Withdrawing money gives me experience in managing cash-flow from the Income Fund because one day I won’t have a salary. There’s no additional tax impact in withdrawing since the money is already in a taxable account.

Fund Cash

Fund Cash is now at $1,355 and held in the VMFXX money market account which is where all dividend distributions are paid into. $52 is uninvested with the remainder reserved for one more distribution of $1,100 to cover the last month in the quarter.

Portfolio Performance

My Income Fund decreased in value from $524,401 to $493,768 this month. This decrease of $30,633 is despite $2,671 of new capital and a distribution of $1,100 however, and so the overall loss was $32,203.

The portfolio all-time high remains $524,401 from April 2019.

Retirement Accounts

Although most of the financial information I describe is about my Income Fund, I should point out that I consider it to be one piece of the bigger picture. Ideally I’d like to reach Financial Independence based solely on my taxable accounts which is 100% stocks, but I still have Retirement accounts in case I can’t. I am maxing out my 401(k) contributions to reach the full $19,000 contribution for 2019.

Financial Independence

Here’s a chart of my living expenses as a percentage of income. As income from my investments increases, the living expense percentage decreases (gets better). However other factors such as changes in net salary (e.g. salary increases or payroll deductions) affect the results too.

My net income in May 2019 was higher than in 2018. This increased the percentage of my living expenses from last May’s 55.1% to 54.4%.

In real terms, since my living expense budget is fixed at $4,120 a month this year and the distribution from my income fund is fixed $1,100 a month, I’m 26% of the way to Financial Independence.

Outlook

I plan on buying two new stocks over the next couple of months to reach a total of 32 companies. I aim to buy about $600 each month out of the $2,500 I usually am able to invest.

I’ve started to slowly unwind my VIHAX holding when there’s an opportunity to tax-loss harvest. Aside from the extra fees on the fund, it’s not as tax efficient as VTIAX.

Summary

The market took a bit of a hit in May but it just means that stocks are a little bit cheaper now and it’s the long run that’s important. How was your latest month? Are you one step closer to Financial Independence?

Quote of the Day

Housework can’t kill you, but why take a chance?

7 thoughts on “May 2019 Income Fund Update”

  1. Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) QDI – 94.01% https://advisors.vanguard.com/VGApp/iip/advisor/csa/investments/taxcenter/yearendfigures

    The difference between qualified and ordinary dividends is quite substantial when the time comes to pay taxes. As the name implies, ordinary dividends are taxed as ordinary income, while qualified dividends are taxed at a lower rate.

    Think about achieving 100% QDI, it will make a huge difference later on.

        1. Hi Dave,
          Thanks for looking up the tax stats! I must admit that when I first bought VIHAX back in 2016, I was more focused on dividend income than total return. And to be honest, since I was paying 24% on regular bank interest, any reduction in the tax rate for dividend income compared to that was “good”.

          I now realize that it’s better to focus on total return and to minimize the tax drag. However this month’s update (May) is historical since my purchases occurred in the past and I’ve tried to write my rationale at the time. While I don’t plan on adding more to International stocks in taxable going forward (from August), VTIAX is more tax efficient than VIHAX (lower dividend yield plus higher QDI) and so the small exchange made sense when I made it. Whether the foreign tax credit makes up the difference is argued both ways on bogleheads although I subscribe to your views that the FTC is not worth it.

          Thanks for your insights as usual!
          Best wishes,
          -DL

          1. Easier to turn the boat now then wait. QDI 100% is great for tax planning. You know exactly what is going to happen. With a floating QDI – it is impossible to plan.

            Thank you for an open mind. I understand being diversified and all that, but paying your fed and state tax rate on ordinary income on dividends when you could easily receive 100% QDI does not make any financial sense. Later on not having 100% QDI income could put you in new brackets and ding you with AMT that is a horrible surprise.

          2. Also having to have to pay a fee to buy and sell VIHAX is not a wise use of your building future wealth efforts.

          3. Yes, I was hoping initially that the fee for VIHAX would go away but the fund overall is inefficient and mostly a result of yield-chasing. I won’t exit the position at once since it has $7k of LT capital gains, but I can sell some lots at a loss and buy back international in my tax-deferred accounts to keep my overall allocation of 20% international.

            Thanks again for your input – it’s been very helpful.

            Best wishes,
            -DL

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