I must go down to the seas again, for the call of the running tide

Is a wild call and a clear call that may not be denied;

And all I ask is a windy day with the white clouds flying,

And the flung spray and the blown spume, and the sea-gulls crying.

John Masefield, Sea Fever

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

My goal is to build up a portfolio capable of providing a passive income of around $90 500 by July 2022 (Portfolio Goal).

Portfolio income summary

Investment	Amount
Vanguard Lifestrategy High Growth (retail fund)	$26,278
Vanguard Lifestrategy Growth (retail fund)	$1,799
Vanguard Lifestrategy Balanced (retail fund)	$3,217
Vanguard Diversified Bonds (retail fund)	$4,469
Vanguard Australian Shares ETF (VAS)	$3,071
Vanguard International Shares ETF (VGS)	$793
Betashares Australia 200 ETF (A200)	$3,037
Telstra shares (TLS.ASX)	$43
Insurance Australia Group shares (IAG.ASX)	$0
NIB Holding shares (NHF.ASX)	$48
Plenti/Ratesetter (P2P lending)	$343
Raiz app (Aggressive portfolio)	$77
Spaceship Voyager app (Index portfolio)	$0
BrickX (P2P rental real estate)	$37
Total Portfolio Income – Half-Year to December 31, 2020	$43,212

The chart below sets out the income or distributions received on a half-yearly basis from the financial independence portfolio over the past five years.

The following pie chart is a breakdown of the percentage contribution of each major investment in the portfolio to the total half-yearly distributions.

Comments

The total of half-year distributions from the portfolio was $43,212 or the equivalent of around $7,200 per month over the past six months.

This result is the fourth highest set of half-year distributions on record, and the highest ever received in the December half-year period by a substantial margin. The half-year results are more than double the two previous comparable periods in 2019 and 2018.

This level of distributions payout was well above expectations. Previously, using past average distribution rates for the Vanguard retail funds and exchange traded funds, I had expected December distributions to come in at around $20,000. This estimation approach clearly did not work reliably, with actual distributions being more than double this figure.

December half-year distributions have typically been much smaller than those released in at the end of June. They generally represent around 30-35 per cent of total annual distributions, or put it another way, they are usually around half the size of June payments.

Trends in portfolio income 2000-2020

The recent end of the calendar year also allows some longer-term comparisons to be made across the journey so far.

This past calendar year distributions totalled $88,492 or around $7,400 per month. This is the highest calendar year distributions total on the journey so far.

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

The over twenty years of distributions data in the chart above demonstrates the powerful effect of compounding as the journey progresses.

The barely visible bars on the left felt like (and were) significant achievements at the beginning of the journey. That small amount across that early year of investing – just $609 in 2000, with almost half interest income from an ING online account – has been overshadowed with time.

Importantly, the shape of the incline in distributions also reflects growth in the overall level of the portfolio itself, with slow progress at first, and then substantial gains in later periods.

More than half of all distribution income has been received in the last four years (green) of this record. Similarly, more than three-quarters of all distribution income has occurred in the past eight years.

In the last portfolio income update I observed that the past four years appears to have established a new normal operating range for portfolio distributions, with most observations falling within the range of $50 000 to $70 000. This result confirms this phase shift of sorts from the past levels of distributions evident until 2015-16.

As noted then, steep falls are possible from here. In particular, despite this record result, it seems likely that these results do not reflect lower payouts likely over the next 1-2 years.

These are likely to be significant under pressure from the effects of the current coronavirus pandemic and associated economic downturn. The impact and nature of recovery from these events could lead to a sustained period of weaker or flat performance in the years ahead.

Taking the manifest – composition of the distributions

While a positive trend of distributions growth is evident, under the surface of the portfolio the actual composition of these distributions continues to shift around over time.

Since around June 2018 significant new investments have been made exclusively in exchange traded funds – A200, VAS and, more recently, VGS. Over time this is gradually increasing the significance of their distributions, compared to the Vanguard retail funds that previously dominated the earlier FIRE portfolio.

This half-year, as with the previous period, however, the Vanguard Diversified High Growth retail fund has sharply defied this slow underlying trend. The Vanguard High Growth fund has in fact played a decisive role in level of overall distributions.

This repeats a past observable phenomenon of this fund playing an outsized and determinative part in setting the level of total distributions.

This can be be seen in this chart below, which sets out the level of, and changes in, major components of portfolio distributions over the past two decades.

The single most significant contribution to sustained high distributions is the distribution from the Vanguard High Growth fund (teal), which has not fallen its usual amount in the December half.

Just discernible on the right of the chart is the continued if uneven growth of distributions from both the VAS (purple) and A200 (blue) exchange traded funds from June 2018 onwards.

Due to coronavirus impacts, these two Australian equity ETFs saw December distribution payouts on a per unit basis between 40 to 45 per cent below the same period last year. In contrast, distributions from the Vanguard international shares ETF (VGS) were down only 10 per cent over the same period.

Vanguard retail funds have again collectively made up more than 80 per cent of total half-year distributions. Across the board, these have distributed higher than average amounts, potentially in part likely due to rebalancing, redemptions and associated realisations of capital gains within the Vanguard retail funds.

For a point comparison against these half-year results, the composition of the full 2020 calendar year distributions is set out in the chart below.

Comparing the average rate of distributions

The overall portfolio distribution rate for this calendar year is 4.8 per cent. This rate is estimated as annual paid out distributions as a simple percentage of the average total portfolio value over the year.

This measure allows a different view of the annual income performance of the portfolio which better accounts for the growing size of the portfolio.

The figure of 4.8 per cent for this calendar year just passed is towards the middle of the rates recorded over time, coming it at a little above the median over the past twenty years, and the rate last financial year.

The median distribution rate over the past two decades remains at 4.4 per cent.

Crossing the lines of position – distributions and expenses

A further measure of importance this record has routinely tracked is the degree to which actual paid out distributions are able to meet either total monthly expenses, or credit card expenses.

The chart below sets out the proportion of estimated total expenses (credit card expenses plus estimated additional annual fixed expenses) that are met by portfolio distributions.

To reduce the volatility of month-to-month results, rolling three-year averages of both distributions and expenses are used in the chart.

What this shows is that since the beginning of this record actual distributions have gone from meeting around 30 per cent of total annual expenses to now meeting nearly 90 per cent of all expenses.

The recent growth from around 75 per cent to this level across 2020 has been caused by both a continued trend fall in expenses, and increased distributions this year.

The higher than forecast distributions this half-year has also significantly changed the shape of the story on progress towards distributions meeting my ‘credit card FI’ goal. This is shown in the following chart.

This takes a three-year moving average of both distributions and credit card expenses up to the end of December.

Previous versions of this graph in regular Monthly Portfolio Updates showed distributions and card expenses touching, and appearing to decline together.

When the same graph is recalculated using the latest higher than forecast distributions, replacing previous placeholder average estimates, it can be seen that a ‘crossing’ event has clearly occurred. From around June or July of this year credit card expenses continued to sink lower, while distributions climbed past them.

In effect, the portfolio now more than pays for every item typically bought on my credit card in day-to-day life.

Current plans for using the distributions

Based on distributions announcements, the December distributions from the Vanguard funds, and exchange traded funds A200, VAS and VGS, should result in around $36,500 of capital available to be invested or used over the next few weeks.

This sum is less than the half year total reported above because September quarter distributions from a number of the funds and ETFs have already been paid and immediately re-invested in October.

In accordance with past practice I will put aside a quarter of the payments (around $9000) to meet future portfolio-related tax liabilities. I also plan to make a symbolic start to fund a ‘freedom’ themed cash sub-account, to build towards my target of having one full year of cash set aside by July 2022.

My current plan is to reinvest the remaining $26,000 in equal increments on a monthly basis though January to July. These increments will be directed according to my recently reviewed asset allocation plan, targeting whichever asset class is furthest from its percentage target allocation in each particular month.

Given my decision in the recent annual review to target over the medium term an equal equity exposure to global and Australian shares, this is likely to mean future investments in both the Vanguard international shares ETF (VGS) and its Australian equity-focused equivalent (VAS). The relative required magnitudes of these investments will depend on future market movements in these markets, taking into account the long-term nature of the target.

Reviewing and redeploying the emergency fund

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

This fund is set at a level of providing the equivalent of one year of expenses equal to my Portfolio Goal target income of $90,500. It is primarily designed to cover expenses in any unexpected periods without employment income.

The December half-year distributions takes the raw five-year average of annual distributions to just over $65,000. I have also reviewed alternate estimates based on average per fund or ETF unit distributions and long-term estimates of total distributions as a percentage of the portfolio. These two approaches suggested likely forward distributions between $58,000 and $59,000 per year.

An average of all of these approaches suggests likely future distributions of around $61,000 per year.

In recognition of this I will be marginally reducing my emergency fund from $31,000 to $30,000 and likely shifting this excess cash amount over to the symbolic ‘freedom’ sub-account mentioned above.

Observations

The December half-year distributions have come in at a startlingly high level, compared both to past averages and prior expectations.

This is especially true given the still developing economic impact of COVID-19 and second wave lockdowns. Resulting reduced dividends are evident for Australian equity ETFs, but not yet across the rest of the portfolio. There could well be a deferred effect operating, such that June and December 2021 distributions will be lower than previous equivalent periods.

The distributions this half-year, however, make reasonably clear that income from the portfolio has now moved decisively beyond the interim measure of paying all regular credit card expenses.

Last year at this time I observed that the income from the portfolio notionally represented another additional full-time worker, effectively earning new capital each day on my behalf, at above the median average wage.

That notional worker was earning $29.31 per standard working hour a year ago. Six months ago, at the time of the last passive income report, they were earning $33.33 per hour. Now, over the past twelve months, they have earned $44.78 per hour.

This past year this dedicated portfolio ‘worker’ has received the equivalent of a 34 per cent pay rise. Or to consider the same phenomenon expressed in another way, each hour of every single day and night last year the portfolio relentlessly worked to earn the equivalent of around $10.10 per hour.

As the previous update noted, this income is drawn from the returns on equity of businesses, and the repayments of bond obligations by thousands of corporations, and hundreds of governments and institutions, spread across every major economy and industry sector of the world.

Twenty one years ago, typing the weekly values of my first ever purchased share (Telstra) into a then bare and simple Excel spreadsheet in September 1999, I could not have imagined this journey.

And yet, even at that time I was unconsciously bending towards this goal of building a passive income to meet daily expenses. The driving purpose was to enjoy greater freedom, autonomy and, essentially a breathing space. A space in the gap between the needs of life, and the time to enjoy other pursuits.

Now set to its task, the running tide seems momentarily impervious to wind or the gathering clouds above. It remains to be seen where exactly this tide will find its high-water mark, and what its turning could signify.

Explanatory Notes

Income distributions reported above do not include associated franking credits. My current preference is to seek to track cash actually delivered to my bank account as a tangible and easy to calculate measure. In financial year 2019-2020 franking credits valued at around $8031 were received from all shares, ETFs and Vanguard retail funds.