MMB Portfolio 2022 2nd Quarter Update: Dividend & Interest Income

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Here’s my quarterly update on the income produced by my Humble Portfolio (2022 Q2). I track the income produced as an alternative metric for performance. The total income goes up much more gradually and consistently than the number shown on brokerage statements (price), which helps encourage consistent investing. I imagine them as building up a factory that churns out dollar bills. You can still track your dividend and interest income with a total return portfolio. You don’t need a bunch of high-yield stocks, MLPs, leveraged REITs, or covered call ETFs.

Background: Overall stock market dividend growth. Stock dividends are a portion of net profits that businesses have decided to distribute directly to shareholders, as opposed to reinvesting into their business, paying back debt, or buying back shares directly. The dividends may suffer some short-term drops, but over the long run they have grown faster than inflation.

In the US, the dividend culture is somewhat conservative in that shareholders expect dividends to be stable and only go up. Dividend cuts tend to be avoided. Thus the starting yield is lower, but it can grow faster. Here is the historical growth of the trailing 12-month (ttm) dividend paid by the Vanguard Total US Stock ETF (VTI), courtesy of StockAnalysis.com. Currently, 31% of VTI’s net earnings are sent to you as a dividend. Notice how it grows gradually, with the current annual dividend 76% higher than in September 2013:

European corporate culture tends to encourage paying out a higher (sometimes fixed) percentage of earnings as dividends, but that means the dividends move up and down with earnings. Thus the starting yield is higher but may not grow as fast. Here is the historical growth of the trailing 12-month (ttm) dividend paid by the Vanguard Total International Stock ETF (VXUS). Currently, 47% of VXUS’s net earnings are sent to you as a dividend. Notice how it stays more stable (but also dropped during 2020 due to COVID), with the current annual dividend only 25% higher than in September 2013:

The dividend yield (dividends divided by price) also serve as a rough valuation metric. 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.

My personal portfolio income history. I started tracking the income from my portfolio in 2014. Here’s what the annual distributions from my portfolio look like over time:

• $1,000,000 invested in my portfolio as of January 2014 would have generated about $24,000 in annual income over the previous 12 months. (2.4% starting yield)
• If I reinvested the income but added no other contributions, today in 2022 it would have generated ~$48,000 in annual income over the previous 12 months.

This chart shows how the annual income generated by my portfolio has changed.

TTM income yield. To estimate the income from my portfolio, I use the weighted “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 (usually zero for index funds) over the same period. The trailing income yield for this quarter was 2.99%, as calculated below. Then I multiply by the current balance from my brokerage statements to get the total income.

Commentary. My ttm yield is now ~3%. Both US and international stock prices have gone down, and my ttm dividend yield has gone up. The price of my Treasury bonds have also gone down as nominal rates have gone up, but the yield will eventually go up as the money is reinvested into new bonds at higher rates. My TIPS yield has gone up significantly as CPI inflation has spiked. Of course, the NAV on my TIPS has also gone down, as real yields have gone up (again will be better as money is reinvested). TIPS are a bit complicated like that.

Use as a retirement planning metric. As a very rough goal, I support the simple 4% or 3% rule of thumb, which equates to a target of accumulating roughly 25 to 33 times your annual expenses. I would lean towards a 3% withdrawal rate if you want to retire young (before age 50) and a 4% withdrawal rate if retiring at a more traditional age (closer to 65). It’s just a target, not a number sent down from a higher being. During the accumulation stage, 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.

Even if do you reach that 25X or 30X goal, it’s just a moment in time. The market can shift, your expenses can shift, and so I find that tracking income makes more tangible sense in my mind and is more useful for those who aren’t looking for a traditional retirement. Our dividends and interest income are not automatically reinvested. They are another “paycheck”. Then, as with a traditional paycheck, we can choose to either spend it or invest it again to compound things more quickly. Even if we spend the dividends, this portfolio paycheck will still grow over time. You could use this money to cut back working hours, pursue a different career path, start a new business, take a sabbatical, perform charity or volunteer work, and so on. This is your one life and it only lasts about 4,000 weeks.