Dividend Income Update - Q3 2015 - Retire by 40 (2024)

Dividend income is my favorite form of passive income. I like rental properties too, but not this month. One of our tenants is leaving at the end of October and I have quite a few things to do. I’m improving the unit and increasing the rent. Dividend income is much easier and I don’t have to spend much time on it at all. Eventually (20+ years), I’d probably move most of our investment into our dividend portfolio. It’s just so much easier than rental properties.

Anyway, 2015 is quickly coming to a close and it’s time for the Q3 dividend income update. One of my goals for 2015 is to generate $10,000 in dividend income. Let’s see how we are doing so far this year and go over a few highlights and lowlights. We will also check on our 2020 passive income challenge.

Dividend income Q3

For the 3^rd quarter, our dividend income was $2,739. That’s a little higher than $2,678 from Q2. The great thing about the dividend 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.
3. New Investment – We try to add new money to our dividend portfolio whenever we can. In Q1, I purchased 100 shares of AT&T and 150 shares of PM. In Q2, I purchased 100 shares of Omega Healthcare REIT. In Q3, I purchased 50 shares of CAT. Q3 was a great time to add to our dividend portfolio, but we ran out of liquidity. We used the cash we had to contribute to our Roth IRAs and my i401k.

Of course, we’ll have some dividend decreases too, but they should be temporary. These drops are usually due to selling stocks and dividend cut. Hopefully, these events don’t occur too often.

Dividend growth

Here are the companies that increased their dividend in 2015 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 increase is pretty good. Quite a few of the increases handily beat inflation.

Dividend Portfolio Performance

Q3 was a down quarter for the stock market and our dividend portfolio was hit too. At the end of Q2, we were up by 2.2%. Today, we are flat for the year at 0% gain (including dividend.) Many stocks are down quite a bit. Here are some notable ones.

• Shell and Chevron are not doing very well in 2015 because crude oil price dropped. Both are down about 12%.
• AbbVie (-15%) The pharmaceutical business is tough.
• Mattel (-20%) I probably should just sell and cut my losses. It looks like Mattel is in a prolonged decline.
• Procter & Gamble (-17%) Declining volumes.
• Walmart (-30%) Walmart’s earnings will drop for a few years because they are investing in their online business and increasing wages.
• Kinder Morgan Inc (-22%) KMI is a pipeline company and they are under pressure due to continued weakness in oil and gas price.
• National Retail Property (-12%) Not exactly sure what’s going on with this one. Consumer spending was weak in Q1, but picked up in Q2.
• Deere & Co. (-11%) According to the news, the farm economy is entering a downturn.

Whew, 2015 is turning out to be a tough year. It’s pretty amazing we are flat for the year considering these big drops. We are actually doing very well compare to my bench mark – VIG, Vanguard Dividend Appreciation ETF. VIG is down 2.2%, including dividend. I would love to pick up some more shares, but we don’t have much liquidity at the moment. I’ll hold on to these stocks and see how it goes. I’m most worried about Walmart and Mattel. Can they turn things around?

2020 Passive Income Challenge

I thought this quarterly update would be a good place to keep track of our 2020 passive income challenge as well. The goal is to have enough passive income to cover all our expenses by the end of 2020. Let’s see how we did in Q3 2015.

• Dividend Portfolio: $2,739
• Rental property: $215
• Interest: $25
• P2P Lending: $167
• Joe’s retirement accounts: $4,887
• RB40’s retirement accounts: $1,291

Total passive income*: $9,324

Q3 expense: $15,661

FI Ratio: 59.53% (FI Ratio= passive income / expense)

*This is pre-tax income so I will have to account for tax later. I’ll just shoot for pre-tax income to surpass expense for now. We’ll deal with tax when we actually reached that point.

Our FI ratio was pretty good in Q3. Many of my Vanguard funds paid out in Q3 so the income there was much higher than in previous quarters. The rental income is a pretty low because I made some improvement to our duplex. So the income side was pretty good, but our expense was higher too. We took a 2 week vacation to Costa Rica and it inflated our expense for the quarter. We really need to buckle down inQ4 and live more frugally.

Anyway, 60% FI ratio is quite good. We probably won’t achieve my goal of 66% for 2015, though. I will have to look at this again when 2015 is over. At this pace, we won’t achieve our goal of covering all expenses with passive income by 2020. We probably will have to make some drastic changes before Mrs. RB40 retires.

Dividend stocks are great for retirees

Q3 was tough because the market was very volatile. None of our dividend stocks reduce their pay out so our dividend income hasn’t been impacted. That’s the nice thing about owning “safe” dividend stocks. Of course, if the economy decline further, we might see some dividend reduction. Meanwhile, I’ll try to scrape some money together so I could buy more dividend stocks while they are on sale.

I still love our dividend portfolio. It doesn’t require much work and the dividend increases every quarter. That’s a great fit for someone who is thinking about early retirement. If you’re in the 15% tax bracket or below, you don’t even have to pay tax on your dividend income.

Are you investing in dividend stocks? How did you do so far this year?

Image credit: flickrby CIMMYT