Whoever wishes to read the future has to leaf through the past.

André Malraux

Twice a year I prepare a summary of total income from my portfolio. This is my seventh passive income update since starting this record. As part of the transparency and accountability of this journey, I regularly report this income.

As discussed in my recent post Between Wind and Water, my goal is to build up a portfolio capable of providing a passive income of around $87 000 by July 2021 (Portfolio Objective).

Passive income summary

• Vanguard Lifestrategy High Growth – $9 024
• Vanguard Lifestrategy Growth – $517
• Vanguard Lifestrategy Balanced – $490
• Vanguard Diversified Bonds – $86
• Vanguard ETF Australian Shares ETF (VAS) – $2 904
• Vanguard ETF International Shares ETF (VGS) – $299
• Betashares Australia 200 ETF (A200) – $5 845
• Telstra shares – $43
• Insurance Australia Group shares – $349
• NIB shares – $156
• Ratesetter (P2P lending) – $862
• Raiz app (Aggressive portfolio) – $130
• Spaceship Voyager app (Index portfolio) – $0
• BrickX (P2P rental real estate) – $45

Total passive income in half year to December 31, 2019: $20 750

The chart below sets out the passive income received on a half-yearly basis from the portfolio over the past three and a half years.

The following chart is a breakdown of the percentage contribution of each investment type to the total half-year income.

Comments

The total half year passive income from the portfolio was $20 750, or the equivalent of around $3 460 per month. This was around the bottom of the range of my expectations, and it continues the pattern of lower December half distributions.

This result, however, is still around a third higher than the previous comparable December half, and almost double that of three years ago.

The forecast of distributions which proved closest to the actual half-year result was based on past average distributions per unit or share held in the Vanguard retail fund and ETFs respectively. This came within around $1 000-2 000 of the actual results.

Looking at the longer term trends, the recent end of the year makes it possible to compare past calendar year data.

The full calendar year results are $57 985, or just over $4 800 per month. This is fairly close to both recent estimates of the likely income potential of the portfolio, and my original Objective #1 target income.

The chart below gives a history of total portfolio distributions, with green indicating the period covered by this record.

The chart reflects the significant progress made in the past three years, and linked to that, the impact of compounding returns once momentum is gained.

Nearly half of the total distributions over the past 20 years have come in the past three years. A key contributor to that has been the growth in the portfolio itself since 2017, undergoing a near doubling.

The absolute level of distributions has fallen over the past two years. This is principally due to two factors, an aberrantly high set of distributions from the Vanguard retail funds across 2017, and a systematic reduction in fixed income distributions, as the portfolio was re-weighted to equities from past Peer-to-Peer lending and interest rates fell (a trend this interesting Bank of England paper posits has been evident for a long-time).

Without these, the overall trajectory of annual distributions would look far smoother. Yet even despite these two recent falls, it would still appear that distributions have moved decisively and permanently above the years prior to 2017.

Structural changes in distributions and sources of variations

The portfolio continues to change slowly over time, influencing the level and variability of distributions.

As an example, in the half-year to December, exchange traded fund distributions (e.g. VAS, A200 and VGS) made up approximately one-third of all distributions. This proportion continues to grow strongly with new investments. Despite this, for the present the annual variation in Vanguard retail fund distributions continues to exert a powerful influence on any given half-year result.

This can be be seen in this chart below, which tracks the movements of major components of distributions through time.

This shows the rapid and relative steady growth of distributions from both the VAS (purple) and A200 (blue) exchange traded funds from June 2018.

In contrast to some previous half-year results, Vanguard retail funds collectively made up less than 50 per cent of total distributions, due to a combination of lower absolute payouts and their typically higher June half-year payout pattern.

For a comparison against the half-year result, the composition of the full 2019 calendar year distributions is set out in the figure below.

From this it is apparent that on an annual basis distributions from the Vanguard High Growth fund, the A200 ETF and Vanguard’s VAS ETF effectively determine distributions currently, representing over 85 per cent of total payments.

The overall portfolio distribution rate (e.g. annual distributions as a raw percentage of the total portfolio value) for this calendar year has been 3.5 per cent, one of the lowest rates recorded so far. This too is likely due to falling fixed interest returns and the increased use of ETFs with lower payouts of capital gains than the Vanguard retail funds. The average (median) distribution rate over the past two decades is 4.4 per cent.

Bending the curves – closer to ‘credit card FI’ 

The full calendar year passing also means it is possible to review comparative trends in distributions and monthly credit card costs, as well as other expenses.

This chart above shows there was a brief window in financial year 2017-18 where unusually high distributions regularly met credit card expenses, and sometimes total estimated expenses. This, however, has clearly not occurred over the past 18 months.

A less volatile indicator of progress towards passive income meeting my ‘credit card FI’ goal is the provided in the following chart.

This takes a three-year moving average of both distributions and credit card expenses up to the end of November of last year – the last available figures.

This shows the gap continuing to close, to leave a remaining gap of around $300 per month between credit card expenses and average distributions. This closure has been accelerated by a steady fall – of around 5 per cent – in average credit card expenses over the past two and a half years since July 2017.

Planned use of distributions through the year ahead

The December distributions from the Vanguard funds, and exchange traded funds A200 and VAS, mean there will be around $14 000 of new capital available to be invested or used over the next few weeks.

Based on past practice I will put aside a quarter of this to meet future tax liabilities. My current intention is to reinvest the remaining $10 000 in equal increments though January to June. These will be placed according to my asset allocation plan, targeting whichever asset is furthest from its target allocation in the particular month.

At this stage that is likely to mean further investments in the Vanguard ETFs VAS and VGS, depending on the relative market movements of Australian and international shares over coming months.

Despite US markets again hitting new heights recently, I continue to be attracted to the broad, simple and low cost diversification VGS offers into areas not well covered by Australian equities. It is noticeable that in each previous portfolio update I expressed a degree of nervousness about further purchases of Australian or US shares at their previous levels (which were, for the record, around 20 per cent lower than today).

Reviewing the emergency stores

A further regular step following finalising the half-year income estimate is to review the level of my emergency fund.

This is set at providing the equivalent of one year of expenses at a level equal to my Portfolio Objective target income of $87 000. It has been primarily designed to cover expenses in any unexpected periods without employment income.

This most recent set of distributions takes the five-year average of distributions to just over $52 000. I have also reviewed alternate estimates based on average per unit or ETF share distributions and long-term estimates of total distributions as a percentage of the portfolio. These suggest likely forward distributions of closer to $54 000.

On the basis of these I am leaving my emergency fund at $33 000. Coincidentally, this appears to be the level a recent survey found for Generation Xers.

Though this has not occurred in this review, over time the growing average portfolio size should have the impact of lowering my emergency fund as the associated flow of distributions rises to replace it. I intend, however, to keep a modest contingency cash allotment for liquidity and unanticipated cash requirements.

Observations

These December distributions fell well within the range of plausible expectations, even if on the lower side of hopes. June payments have traditionally been more volatile.

For the calendar year just past, distributions paid more than 80 per cent of credit card expenses, and the gap is consistently narrowing over time.

The calendar year distributions total of $57 985 just exceeds total median wage of an Australian adult worker in 2019. That is, the portfolio effectively represents an additional full-time worker, busy earning additional capital every hour of the day and night, with their activities and risks spread across every major economy and industry sector of the world.

This ‘portfolio’ worker takes no sick leave or holidays, and has almost no associated costs. Compounding through time, this is a significant force to propel progress forward, and represents a slowly building pool of available time and ease.

These December results were perhaps never likely to make a critical impact on their own, but they are tangible manifestations of the underlying and powerful force of past savings and investments. They also help somewhat confirm my previous analysis of the portfolio income potential.

A further positive development is that with each half-year portfolio income report the trends and outer boundaries for expectations appear to grow more defined.

Leafing through the past has helped see the future a little clearer than yesterday, and show, even if distantly, the way to journeys end.

Explanatory Notes

1. Income distributions reported do not include franking credits. My current preference is to seek to track cash actually delivered into my bank account as a tangible and easy to calculate measure. In this past half year franking credits valued at around $3 000 were received from shares and ETFs (not including the Vanguard retail funds).