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Dividend Income Update – Q3 2016


Q3 Dividend Income updateIt’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.

  1. 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.
  2. Dividend Growth– Most of the companies in our portfolio should increase their dividend payout every year. More details below.
  3. 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.

Stock Sales

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.

Cash Reserve

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.

Dividend Growth

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
Intel 8%
AT&T 2%
Eli Lilly 2%
Target 7%
Leggett & Platt 6%
Abbot Lab 8%
AbbVie 16%
JP Morgan 9%
Coke 6%
Mondelez 12%
Altria Group 8%
General Mills 8%
Procter & Gamble 1%
Walmart 2%
KMI* -74%
National Retail Property 5%
Western Union 3%
Sysco 3%
Universal Corp 2%
Ford** 42%
Philip Morris 2%
OHI 8%
Hasbro 11%

*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?

If you need help keeping track of your investment, try using Personal Capital to manage your portfolio for free. We have many investment accounts and Personal Capital helps us see the big picture.

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Joe started Retire by 40 in 2010 to figure out how to retire early. He spent 16 years working in computer design and enjoyed the technical work immensely. However, he hated the corporate BS. He left his engineering career behind to become a stay-at-home dad/blogger at 38. At Retire by 40, Joe focuses on financial independence, early retirement, investing, saving, and passive income.

For 2018, Joe plans to diversify his passive income by investing in US heartland real estate through RealtyShares. He has 3 rental units in Portland and he believes the local market is getting overpriced.

Joe highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help every investor analyze their portfolio and plan for retirement.

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{ 48 comments… add one }
  • Mr. Tako @ Mr. Tako Escapes October 10, 2016, 12:27 am

    Great update Joe! And a great dividend income for the year!

    Obviously mine is going to come in a little bit higher at around $43k for the year — we lack the rental property you have.

    Like you, I’m nervous about valuations right now. Given the earnings growth I’m seeing, prices look dumb.

    Other than forced sales (like ENH), I’ve only been moving money around, and haven’t really made a dent in my cash pile this year. If the ENH sale goes through, I’ll have WAY too much cash sitting around in Q1 2017.

    • retirebyforty October 10, 2016, 9:17 am

      Your dividend income is fantastic. I’d love to get there at some point. It will take a while because most of our investments are in the retirement accounts. Having too much cash around is not a bad problem to have. 🙂 I’m sure we’ll see some bargains in 2017.

  • Kate @ Cashville Skyline October 10, 2016, 2:55 am

    Honestly, that KMI dividend cut freaked me out and I sold my positions late last year. As much as I enjoy dividend investing, I’ve wondered if I’m better off just buying a bunch of index funds in my brokerage account instead. I worry that I’m tempted to make too many emotional decisions. That being said, I love the passive income. I’m earning over $1,000 extra per year right now from dividends.

    • Matt October 10, 2016, 6:22 am

      Kate you would be better diversified and indexing in a variety of kinds of stocks would give you the peace of mind of owning 1000’s of stocks and not counting on a handful. Having large cap, small cap, growth and value along with international would give you a smoother ride the bad markets. Buy low cost index funds from Vanguard. Diversification is the key in my opinion.

      • Dividend Ten October 13, 2016, 2:12 am

        Actually studies prove that you get most of the benefits from diversification with around 10-20 stocks, after which you start having diminishing returns. Diversification is just another word for not having confidence in your ideas. Or as Buffett says, “diversification is protection against ignorance. It makes little sense if you know what you are doing.” Best regards,

    • retirebyforty October 10, 2016, 9:23 am

      That was smart with KMI. I think at this point, you would be better off with index funds. The index funds in our retirement accounts are the foundation of our investments. $1,000 extra per year is awesome, though.

      • Mr. All Things Money October 10, 2016, 4:08 pm

        I would add, you can find good dividend focused Indexes with no commission cost e.g. TD Ameritrade offers VYM (vanguard divi index fund) and Fidelity offers DVY with no commission cost.

  • Alberto Ortiz October 10, 2016, 3:10 am

    Thank you for this article. It is one of my goals to develop a dividend growth portfolio so the mechanics are important. A lot of people share your market outlook.

    Our view is more up to the election and who gets in. If one side is in, market is happy short term and crashes long term. The other side, crashes short term but goes up long term. We call it pick your poison.

    Again thank you for the article!

    • retirebyforty October 10, 2016, 9:24 am

      The stock market will crash at some point. We just need to be ready to weather the storm. Good luck!

  • The Green Swan October 10, 2016, 4:36 am

    Hi Joe, not a bad idea to be sitting on a bit of cash ready and waiting to deploy. Curious though if you have thought through how you’ll deploy it if there isn’t a correction within the next year or so? I always find it hard psychologically to convince myself to put it back in the market if it hasn’t dipped like I’d expect. I would probably find it helpful to put guidelines out there to force myself to do it.

    • retirebyforty October 10, 2016, 9:25 am

      No, I don’t have a plan to redeploy if there isn’t a crash in 2017. It gets harder and harder to buy in when the market keeps increasing. We still contribute to our 401k and Roth IRA, though. I’ll work on that guideline for the follow up post. Thanks!

  • Apathy Ends October 10, 2016, 5:11 am

    Thanks for the breakdown – you have built a pretty impressive Dividend Portfolio. I am also curious to read your answer to The Green Swans question above as I have similar experiences.

  • Dividend Growth Investor October 10, 2016, 6:12 am

    That is an impressive amount of dividend income Joe. Earning $1,000/month without lifting a finger is the beauty of passive dividend income at its best. To put it in perspective, some people work full time in menial minimum wage jobs to earn that kind of money every month. Since you have created that cash machine, you will never have to get to that point!

    Once you get to redeploy that extra cash, your annual dividend income will likely increase by up to $1,000.

    • retirebyforty October 10, 2016, 9:26 am

      You’re right about minimum wage jobs. They’ll have to pay much more tax too. We didn’t pay any tax on our dividend income last year…

  • Stefan - The Millennial Budget October 10, 2016, 7:52 am

    Impressive stuff Joe. I started my DGI journey 4 months ago and once I begin working next month I expect to see substantial increases in my annual dividend amount. Based on the time I started and the market I am outperforming it.

    I really enjoy how you spoke about dividend coverage ratio. I think you will hit that 25% mark sooner than 2020. As I am now starting I like to see what my monthly dividends can cover. Of course I reinvest them all but it is a fun way to look at dividends while I wait years for compounding and growth to take effect.

    • retirebyforty October 10, 2016, 9:28 am

      Good luck! Don’t be discouraged if the market crashes at some point. It will be a great opportunity to pick up shares on sales.

  • Your First Million October 10, 2016, 8:47 am

    Wow that is an awesome portfolio you have built up! Dividend income is great because you don’t have the landlording responsibilities and maintenance issues that you do with rental properties. I still prefer real estate over stocks however, because there are more than 2 ways you make money in real estate (cash flow, appreciation, tax savings, etc). Not to mention that if you buy right, your ROI is usually a lot higher than what you can find in a dividend stock. Nevertheless, awesome portfolio and great post!

    • retirebyforty October 10, 2016, 9:29 am

      Thanks! I like rentals too, but it’s just a lot of work for me. I need to find a good property manager so it can be more passive.

  • Michael @ Financially Alert October 10, 2016, 10:22 am

    Nice dividends for 2016, Joe! I’m at $6280 currently, which should put me around $7300 for the year. Like you I’ve been trimming my positions and hoarding some extra cash. But, it does feel a bit wasteful watching it sit there! 😉 Where do you keep your free cash? Mine is wallowing in the brokerage houses MMAs and cash. What do you think? Are there any other better places to park it, but still keep it easily accessible?

    • retirebyforty October 10, 2016, 11:21 pm

      Nice dividend for you as well. I’m keeping most of the cash in our reward checking. I probably should send them to MMAs. It should fine for a year or so. It’s just a small part of our net worth anyway.

  • Mr. All Things Money October 10, 2016, 3:57 pm

    Good call on Intel. I also sold few hundred shares when stock hit 38 which is a 15 year high. I am in a hurry to trim my position in Intel as I don’t believe the recent price run-up, caused by some PC sales recovery, would last. Long-term I just don’t see a good enough catalyst for the stock to go high.

    I will trim some more next year when I am in lower tax bracket and then keep the rest for dividends.

    • retirebyforty October 10, 2016, 11:22 pm

      That’s great timing. I sold when it was 35. 🙁

  • Mustard Seed Money October 10, 2016, 3:57 pm

    $11,000 in passive dividend income is very impressive.


    Also awesome buy of KMI at the bottom. I wanted to buy something but was worried about catching a falling knife. I unfortunately was a little gun shy after buying Chipotle at what I thought was a steal of a deal price. I’m still hoping that it will come back.

    • retirebyforty October 10, 2016, 11:22 pm

      Good luck with Chipotle. They had too many incidents in a short period. Hopefully, they are better now.

  • Dividend Diplomats October 10, 2016, 4:34 pm

    RB40 –

    Thanks for sharing your post. You never know – your mutual funds could have a great 4th quarter dividend payout + capital gain distribution. You may get to the $11,500, keep your ear to the floor on the market, and maybe there will be a buying opportunity for you this quarter, that will allow you to receive a divvy as well in the current year. Nice job, as well, as I received about $1.7K in the Q3 time frame.


    • retirebyforty October 10, 2016, 11:25 pm

      I only have VPL in our dividend portfolio so I don’t expect any big jump in Q4. Our retirement accounts should look good, though.

  • PatientWealthBuilder October 10, 2016, 6:17 pm

    Hey great update and way to go on beating the relevant index. But why not just invest in the index?? You could forgo all the ins and outs etc. from all the stocks and re-balancing and selling and buying… its making me tired just writing it all out. Just buy the index and forget it! right?

    I think the best place to keep cash is … well… in cash. Here is my thinking, the return that I am eventually going to get by being patient is going to more than make up for the lost interest. That has never been more true than in today’s low interest rate environment. I can’t believe that a 1% interest rate is considered good right now. Unless you are sitting on $1 billion just let it sit in cash and be ready to deploy when that great opportunity comes along. My 2 cents 🙂

    • retirebyforty October 10, 2016, 11:27 pm

      It gives me something to write about! 🙂 The cash reserve is just a tiny part of our net worth, but it makes me feel like I’m doing something. At least I don’t touch our retirement accounts.
      I like keeping it in cash too.

  • Dividends Down Under October 10, 2016, 6:35 pm

    I like how you’ve laid out all your dividend increases Joe – nice job owning such a great set of companies.

    Congrats on the awesome amount of income. I was really surprised that your income went down, but it makes sense – you sold some 🙂 I’d be selling too in your shoes, particularly Intel.

    We received a new all-time record of dividends (for us) in September and almost made it to 3 digits.


    • retirebyforty October 10, 2016, 11:28 pm

      Thanks! Hopefully, the dividend will go back up next year. Although, if we see a big crash, some dividend might be cut…

  • Jon @ Be Net Worthy October 11, 2016, 3:05 am

    Joe, what a great dividend portfolio you have built! My stock portfolio is up around 9.5% for the year, beating the S&P which is only up around 5.9% or so.

    It was really driven by a small allocation I have of the Vanguard Precious Metals fund up about 60% and the Vanguard Energy fund up around 30%.

    This reminds me that I should probably write a post about this!

    • retirebyforty October 12, 2016, 12:49 pm

      9.5% is great! That’s much better than the S&P 500. I think dividend stocks are doing very well recently because everyone is searching for yield. Now it’s hard to find any good deal.
      Wow, those are great gains on the Vanguard funds.

  • MrSLM October 11, 2016, 9:00 am

    Sweet, those are some impressive numbers. I’m currently at around $20.5k per year in dividends, hoping to cross over the $21k mark in the next couple months though. Like others, I’m also curious how you’re going to approach the market if the correction doesn’t come, or is underwhelming.

    • retirebyforty October 12, 2016, 12:51 pm

      $20.5k per year is great! Hopefully, we’ll get there in a few years. Next post will be about cash reserves!

  • Michael October 11, 2016, 12:07 pm

    That’s awesome that your dividend portfolio is beating VIG this year.

    I don’t have a separate dividend portfolio – however, I do have good dividend paying stocks and ETFs as part of my after tax investment portfolio.

    This year my dividend income would total about ~$5000.

    • retirebyforty October 12, 2016, 12:52 pm

      Great job with your dividend income. What’s your plan for the rest of this year and 2017? Keep buying more dividend stocks?

      • Michael October 13, 2016, 8:56 am

        Thank you. Right now, I am accumulating Charles Schwab’s SCHD dividend ETF (0.07% expense ratio) whenever the market dips.

        Great question! It is my goal in 2017 to split my after tax investment portfolio into two buckets – (A) Dividend and (B) Value and Broad Market – and track them.

  • Roadrunner October 11, 2016, 3:05 pm

    Very impressive dividend income! I’m at the very beginning of building a similar portfolio for passive income. My first yearly aim is EUR 700, so still a long way to go (wish I started earlier) 🙂 The majority of my portfolio is in US stocks, although there seem to be only 4 companies that we both have.
    How do you compare your performance vs VTI if you make changes to your portfolio during the year? Like how do you take the mid year purchases into consideration? I also would like to compare my performance to a benchmark but haven’t figured out the best way to do so…

    • retirebyforty October 12, 2016, 12:54 pm

      Great job starting your portfolio! I just look at the total value of my account vs VIG.

  • Jay @ ITF October 11, 2016, 6:39 pm

    Thanks for the great update. I really like your focus on dividend coverage ratio. I’m sure it’s been rewarding to watch that number steadily creep higher!

    • retirebyforty October 12, 2016, 12:55 pm

      It’s been great to see the coverage creeps up over the last few years, but the inverse is true too. This last quarter hasn’t been good and it’s a bit discouraging. I can’t wait to redeploy our cash reserves.

  • London Rob October 12, 2016, 12:00 am

    Hi RB40,

    Congratulations on another good month and serious amounts of dividends coming in – it is a great feeling getting that money for doing nothing!
    I know what you mean about a market crash – I am still waiting and trying to time the market (a mugs game, but so far this year its worked well for me), but from next year I am intending to start an experiment, with my own real money, of drip feeding monthly in to a world tracker and bond fund and just publish what that actually does, against my attempts!

    Its a great position to be in if you can sit on the cash and not need to invest it – I havent seen anything worth buying for some time, but I want to make sure I have a good slug of cash for when it comes 🙂
    Performance for this year, until a crash, I am very happy with: I havent broken the 1k GBP a month, but was close last month and due another good month this month. I offset it by the fact that the portfolio is up over 50% this year, so I know I need to sell something and lock that in!
    London Rob

    • retirebyforty October 12, 2016, 12:56 pm

      Wow, 50% gain is beyond awesome. You just need to repeat that for a few years. 🙂 You could open your own hedge fund!

  • Fiscally Free October 12, 2016, 8:26 am

    Our investments are pretty flat this year, but that seems to be the market trend this year, so I’m not worried about it.
    I agree a correction is probably coming, but I can’t point to any real indicators that support that. It is more of a hunch, which is what everyone seems to say. I don’t really like taking action based on a hunch, so I’m feeling conflicted on how to invest right now. Why do you think a correction is coming?

    • retirebyforty October 12, 2016, 12:57 pm

      Basically, the PE is too high. It will revert to historical value at some point, but that could take a while. Once the fed increase the interest rate, I think the house of card will crumble…

  • Dennis @ NestEggRx October 12, 2016, 7:17 pm

    “Rental income is great too, but it takes more work.”

    This is absolutely a true statement if you are speaking about investing in real estate actively, but just remember that you can also invest in real estate passively as well. You don’t necessarily have to become a landlord to invest in real estate.

  • Scott Cole October 19, 2016, 5:42 pm

    I’m not much of a long term investor…I have more of a trader’s mentality. But, there is something to be said for investing a portion of a portfolio in nice dividend paying stocks. Just be careful about expecting the market to always rebound from a major bear market so nicely as it has done over the last seven years. That rebound has been all about money printing and not due to a healthy economy. More people are dependent upon the government now than before the financial crisis. Given that we’ve doubled the national debt since then as well, I suspect that the next bear market will be pretty devastating.

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