My Money Blog Portfolio Income Update – February 2021

While my February 2021 portfolio is designed for total return, I also track the income produced. 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. Interest from bonds and bank deposits are steadier, but these days it actually lags inflation a bit.

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 close 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.

This quarter’s trailing income yield of 1.74% is the lowest ever since 2014. At the same time, my portfolio value is also bigger than ever. This just confirms that much of the recent US stock market price rise has been due to P/E ratio expansion, as opposed to higher earnings and profits. Either prices will drop quickly and then the future will look brighter, or prices won’t drop and the future will simply hold lower returns.

I choose to treat this income as a “no-stress, perpetual withdrawal rate”. There are countless articles debating this topic, but I 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). If you are not close to retirement, your time is better spent focusing on earning potential via better career moves, investing in your skillset, and/or looking for entrepreneurial opportunities where you own equity in a business asset.)

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 real paycheck, we can choose to either spend it or reinvest in more stocks and bonds.

Although we are not retired, this portfolio income does enable us to have more flexible working hours as parents of three young kids. If we’re being honest, I don’t think either of us truly wants to be a full-time stay-at-home parent while the other works for money full-time. Nor do we want to be the sole full-time worker while the other stays at home. This works best for us.

We are very thankful for this financial flexibility (always, but especially during this pandemic), which has been both a result of conscious preparation over 15+ years and good fortune. Others may use their portfolio income to pursue new interests, start a new business, sit on a beach, do charity or volunteer work, and so on.