It’s time to check up on our dividend income, my favorite form of passive income. Rental income is great too, but it takes more work.
I started investing in the stock market when I began working full time in 1996. First, I contributed to my 401k. After a few years, I was able to fully max out my 401k contribution and kept that up until now. Currently, our retirement funds are all invested in low cost Vanguard funds. I also started investing in my taxable brokerage account in the late 90s. I started off small and invested in “growth” stocks. By growth, I mean whatever my friends were talking about. I had some winners and losers, but never bought into any huge gainers like Apple and Google. I never trusted the high valuation of those tech stocks.
In 2010, I made early retirement my goal and started converting my taxable account into a dividend portfolio to generate passive. This time I focused on buying solid blue chip companies with a track record of dividend growth. My goal is for the dividend income to cover about 25% of our cost of living until we can access our retirement funds. The rest of our monthly expense will be covered by a combination of business income, rental income, interest income, and side hustles.
Here is the recap of our dividend income so far.
- 2012: $6,791
- 2013: $8,036
- 2014: $8,759
- 2015: $10,695
- 2016: projected $10,925
The stock market did pretty well in Q3 2016. There was a big dip at the end of Q2 due to Brexit, but the stock market was relatively stable after that. The S&P 500 gained about 6% since the beginning of 2016. That’s not bad at all. However, the stock market has been on a roll for a long time now. The S&P 500 index gained almost 300% since early 2009! That’s over 7 years of steady increase. The valuation of the S&P 500 index is higher than historical average and there will be a major crash at some point.
Dividend Income Q3 2016
In Q3 2016, our dividend income was $2,681. Our dividend income for the first 3 quarters of this year came to $8,410. The nice thing about a dividend growth portfolio is that our dividend income should increase over time. This is due to three factors.
- Reinvested Dividend– I reinvest our dividend income in new stocks. I don’t DRIP because it complicates the tax when you sell. Although, now that the broker keeps track of everything, it should be pretty easy.
- Dividend Growth– Most of the companies in our portfolio should increase their dividend payout every year. More details below.
- New Investment– We try to add new money to our dividend portfolio whenever we can.
In Q1 2016, I purchased 100 shares of Kinder Morgan Inc. The price was beaten down to under $12 and I purchased right at the bottom. In Q3, I purchased 700 shares of LYG. Lloyd was down after Brexit and I thought it was a good time to pick up a few shares.
However, there was a little hiccup in Q3. If you look closely at the graph, you’ll see that our dividend income decreased a little bit last quarter. It dropped 2% from Q3 2015. This decrease is due to stock sales. I think the stock market is overvalued right now and I haven’t reinvested much. The dividend drop is not a good trend, but hopefully it will only be temporary. Once I reinvest the dividend and the proceeds from the stock sales, then the dividend should pick back up. Meanwhile, the money is in our checking account earning very little interest.
I sold the following stocks in Q3.
- 378 shares of Intel. I thought the company wasn’t doing well because they are treating their employees like dirt. The stock has gone up since I sold, though. I should have remembered that Wall Street likes heartless companies.
- 111 shares of KMI. I sold these to offset the gain from the Intel sale. These were the old KMP shares that were converted to KMI, then dropped like a rock. I still have 100 shares from the Q1 purchase.
I haven’t reinvested much this year and we’re saving as much cash as we can to prepare for the stock market in 2017. Here is how much cash we have reserved for the dividend portfolio.
- Dividend Cash reserve = dividend income + sale income – purchases
This sum comes to $20,810. That’s a good chunk of change, but really not a huge percentage of our net worth. I think we can afford to wait one year to redeploy this cash.
The dividend growth part of the equation looks good. Here are the companies that increased their dividend in 2016 so far. Most of them are just one or two cents increase, but that’s still better than nothing. Actually, if you look at the percentage, the increases are quite significant. Many of these dividend increases handily beat inflation.
|Stock||Dividend Increase 2016|
|Leggett & Platt||6%|
|Procter & Gamble||1%|
|National Retail Property||5%|
*KMI cut their dividend by a huge amount in 2016 to focus on long term growth.
**Ford paid out $1 Billion in special dividends in Q1 2016. They had a good year in 2015.
Dividend Portfolio Performance
Our dividend portfolio did extremely well so far in 2016. We gained 11% via price appreciation and about 2.8% via dividend. This compares favorably to our benchmark – VIG, Vanguard Dividend Appreciation ETF. VIG is up 6.7% plus 1.6% dividend. We’re 5 percentage points ahead and that’s huge.
2016 Dividend Target
My dividend income target for 2016 is $11,500. That’s about $900 increase from 2015. I don’t think we are going to meet this goal in 2016. My spreadsheet indicates that we’ll receive $11,163 in dividends this year. This is a bit lower than I expected because we sold some stocks and I haven’t reinvested.
You can see our 2016 dividend portfolio here.
Dividend Coverage Ratio
As I mentioned in the beginning, my goal for our dividend income is to cover 25% of our expenses. For the first three quarters of 2016, our dividend income covers 21% of our expenses. That’s not bad and we should improve over time. I’m optimistic that we’ll get there by 2020.
Do you invest in the stock market? How are you doing so far in 2016?
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