MMB Portfolio Update July 2021: Dividend and Interest Income

While my July 2021 portfolio asset allocation is designed for total return, I also track the income produced quarterly. Stock dividends are the portion of profits that businesses have decided they don’t need to reinvest into their business. The dividends may suffer some short-term drops, but over the long run they have grown faster than inflation. Here is the historical growth of the S&P 500 absolute dividend, updated as of 2021 Q2 (source):

This means that if you owned enough of the S&P 500 to produce an annual dividend income of about $13,000 a year in 1999, then today those same shares would be worth a lot more AND your annual dividend income would have increased to $50,000 a year, even if you spent all that dividend income every year.

I track the “TTM” or “12-Month Yield” from Morningstar, which is the sum of the trailing 12 months of interest and dividend payments divided by the last month’s ending share price (NAV) plus any capital gains distributed over the same period. I prefer this measure because it is based on historical distributions and not a forecast. Below is a rough approximation of my portfolio (2/3rd stocks and 1/3rd bonds).

Trailing 12-month yield history. Here is a chart showing how this 12-month trailing income rate has varied since I started tracking it in 2014.

Portfolio value reality check. One of the things I like about using this number is that when stock prices drop, this percentage metric usually goes up – which makes me feel better in a bear market. When stock prices go up, this percentage metric usually goes down, which keeps me from getting too euphoric during a bull market.

Here’s a related quote from Jack Bogle (source):

The true investor… will do better if he forgets about the stock market and pays attention to his dividend returns and to the operating results of his companies.

Absolute dividend income history. It was more difficult to track the absolute income produced as I’d have to remove the effect of additional investments, reinvestment of dividends and interest, rebalancing, and capital gains distributions. To get a general idea, I looked at the Vanguard LifeStrategy Growth Fund (VASGX) to see what kind of income that $1 million back in 2014 would have generated up until today. This is not exactly my portfolio, but is somewhat close at a steady 80% stock/20% bond ratio with some international stock exposure. For example, it’s current 12-month yield is 1.59%.

During 2014, VASGX distributed about $0.61 of income per share, at an average price about $29 per share. That’s a yield of about 2.1%. So $1,000,000 of VASGX in 2014 would have distributed about $21,000 of annual income (about 34,482 shares).

Those same 34,482 shares would be worth about $1,510,000 currently (as of 7/16/2021 at $43.79 per share). In 2018, the income produced was roughly $27,500 a year (80 cents per share). In 2019, the income produced was $29,000 a year (84 cents per share). In 2020, the income produced was $23,000 a year (67 cents per share ).

Putting it all together. This quarter’s trailing income yield of 1.69% is the lowest ever since 2014. It is almost exactly 1% lower than what it was in late 2018. At the same time, both the portfolio value and the absolute income produced is higher than in 2014. If you retired back in 2014 and have been living off your stock/bond portfolio, you’ve been doing fine.

However, this is not necessarily good news going forward. There are countless articles debating this topic, but I historically support a 3% withdrawal rate as a reasonable target for planning purposes if you want to retire young (before age 50) and a 4% withdrawal rate as a reasonable target if retiring at a more traditional age (closer to 65). However, nobody is guaranteeing these numbers and flexibility may be required to make your portfolio reliably last a long time.

If you are not close to retirement, there is not much use worrying about these decimal points. Your time is better spent focusing on earning potential via better career moves, improving in your skillset, and/or looking for entrepreneurial opportunities where you can have an ownership interest.

How we handle this income. Our dividends and interest income are not automatically reinvested. I treat this money as part of our “paycheck”. Then, as with a traditional paycheck, we can choose to either spend it or invest it again. Even if still working, you could use this money to cut back working hours, pursue new interests, start a new business, travel, perform charity or volunteer work, and so on.