Passed years seem safe ones, vanquished ones, while the future lives in a cloud, formidable from a distance.
Beryl Markham, West with the Night (1942)
Twice a year I prepare a summary of total income from my financial independence portfolio. This is my fifteenth portfolio income update since starting this record. As part of the transparency and accountability of this journey, I regularly report this income.
My primary goal is to maintain a portfolio of at least $2,870,000 which is capable of providing a passive income of around $99,000 (in 2024 dollars).
Portfolio income summary
| Investment | Amount |
| Vanguard Lifestrategy High Growth (retail fund) | $14,139 |
| Vanguard Lifestrategy Growth (retail fund) | $629 |
| Vanguard Lifestrategy Balanced (retail fund) | $727 |
| Vanguard Diversified Bonds (retail fund) | $140 |
| Vanguard Australian Shares ETF (VAS) | $9,914 |
| Vanguard International Shares ETF (VGS) | $6,896 |
| Betashares Australia 200 ETF (A200) | $6,442 |
| Telstra shares (TLS.ASX) | $45 |
| Insurance Australia Group shares (IAG.ASX) | $114 |
| NIB Holding shares (NHF.ASX) | $180 |
| Plenti/Ratesetter (P2P lending) | $100 |
| Raiz app (Aggressive portfolio) | $190 |
| Spaceship Voyager app (Index portfolio) | $0 |
| BrickX (P2P rental real estate) | $21 |
| Total Portfolio Income – Half-Year to December 31, 2024 | $39,537 |
The chart below sets out the distributions received on a half-yearly basis from the financial independence portfolio over the past eight years.
The following pie chart is a breakdown of the contribution of each major current investment in the portfolio to the total half-yearly distributions.
Comments
This half-year to 31 December 2023 the portfolio had total distributions of $39,537, or around $6,600 per month over the past six months.
This is the second highest distributions paid out for this December half-year period (after 2020), but comes after a generally weaker set of payouts in the first half of 2023.
As a result, the full calendar year distributions of $76,479 were the lowest since 2019. Just as in that year, distribution have fallen for two consecutive years.
This calendar year result was around 15 per cent lower than forecast a year ago, and is also below the median payout expected for 2024. These estimates are made based on past average distribution rates per unit for the Vanguard retail funds and exchange traded funds.
December half-year distributions are typically much smaller than those released at the end of June.
With the shift of the portfolio towards ETFs that distribute on a quarterly basis, this pattern is somewhat weakening over time, to be replaced with slightly more even payments through the year. Looking forwards what should be expected is still a higher payout in the June quarter – of around 40 per cent of total distributions – but with a more even split between the other three quarters.
The switch made by Vanguard around some of its older legacy retail funds through last year, which will now see quarterly payments being made, will accelerate this trend. Over time this will reshape the profile, likely leading to their being less inherent logic in thinking about ‘June’ and ‘December’ half-yearly portfolio income.
This calls into question the degree to which it might make sense to switch to smaller quarterly income updates, and an annual summary, but on the other hand early July and January are times when the time exists to analyse the trends, and there is a natural logic to reporting calendar and financial year data.
This recent pattern of a ‘flattening out’ of the portfolio distributions within the year can be seen in the chart below, in particular through the growth from year to year in Quarter 1 (March) and Quarter 3 (September) in particular.
The technical change in the underlying Vanguard investments – which occured at their initiative, and thankfully without realisation of capital gains, have somewhat impacted the numbers in this portfolio income report.
As part of this automatic transaction, what seems to have occurred is a liberation of the expected distributions from the previous but now discontinued Vanguard retail fund and automatic reinvestment (styled as a dividend reinvestment in the transaction summary) of this sum into the new replacement fund (VAN0111AU, in the case of the largest high growth index fund).
This means the actual level of paid out Vanguard funds are much lower than in the summary above.
As an example, the largest High Growth fund paid out $3,723 in cash in the December quarter, but a dividend reinvestment of $10,416 occurred in late September. As a result, I have reported this as ‘income’ of $14,139, even though the latter amount was automatically reinvested as part of the fund type changes. This is a one-off event, and should not affect future reporting.
Long-term trends in portfolio income: 2000 to 2023
The end of the year allows for a longer-term perspective on distributions to be provided, covering the entire financial independence journey to date.
This calendar year just passed distributions totalled around $76,000 – or approximately $6,300 per month.
The represents the only the fifth highest calendar year distributions on the entire journey, and is around the median of the last five years of results.
The chart below gives a history of total portfolio distributions in nominal dollars, with green bars indicating the period covered since the start of this written record.
The red dotted line tracks the average level of the portfolio across each year, which have now undergone consecutive falls in the past two years, a pattern that also occurred from 2017 to 2019.
There are now twenty-four years of data in the above chart reflecting a long-term journey from the early years of my professional career until now.
Over that time, the types of investments and market conditions have changed substantially. Within each of these bars is income generated by an changing mixture of funds and fixed interest investments, across a variety of markets and conditions.
From the above, it can be seen that measures of portfolio value have ‘delinked’ from distributions in the past year – likely because the portfolio value is reflecting the recent growth in the value of Bitcoin.
Over the past five years, the median average annual distribution has been around $77,000 while the mean average has been around $89,000.
There remains a heavily compounding element to the timing of distributions. Over 70 per cent of the nominal value of all distributions has occurred since 2017, and nearly half in the past four calendar years.
As in previous reports, it should be noted that for simplicity the graph above tracks nominal dollars and so mildly overstates the ‘real’ value of recent distributions and portfolio values compared to distributions earlier on the journey.
This slightly exaggerates the relative apparent significance of recent progress compared to earlier years, but it does not change the essential analysis.
The results for this year would seem to indicate a general tendency for the distributions to remain drawn to a central tendency of around $80,000, with substantial but temporary variations around this.
While past consecutive years of lower distributions have been followed by much higher values, I do not expect the record distributions of 2021 to be matched at any point into the future, owing to the exceptional circumstances that led to them.
The evolving composition of portfolio distributions: from 2017-2023
The composition of the portfolio distributions received over the past seven years of the journey continues to gradually evolve.
Many of the trends evident here are slow moving and have been discussed sufficiently in previous income reports.
They flow naturally from a focusing of all major investments since 2018 into three exchange-traded funds – A200, VAS and VGS.
In the half-year to December, only 36 per cent of total distributions came from the largest Vanguard fund, where once this fund essentially defined the level of overall portfolio income.
The chart below shows this process in action – setting out the different level and components of half-year to end December period over the last seven years.
The same overall trend can be seen in the full calendar year data, which is set out in the chart below.
From around 2019 the exchange traded funds appear as significant contributors to overall distributions, expanding to make up around 55 per cent of all distributions in 2023.
For a different view compared to the the half-year results above, and a broader picture, the composition of the full 2023 calendar year distributions is set out in the pie chart below.
A longer-term perspective on the shifting composition of distributions: 2000-2023
A different perspective on the same processes, applied across a longer time period, is provided by the chart below.
This details the level of, and changes in, major components of portfolio distributions over the past two decades.
The dominating feature of this chart remains the high and variable distributions from the Vanguard High Growth fund (teal).
These often include a large element of paid out capital gains arising from fund rebalancing to meet allocation targets, or fund redemptions, neither of which are pure investment income generation.
The future patterns of this fund may be slightly different to those experienced to date, with the change to the underlying Vanguard fund invested in, and the move to quarterly payouts.
Over the past four year distributions from the VAS (purple) and A200 (blue) and to a lesser extent VGS (grey), exchange-traded funds have continued to grow to become become significant in their own right.
Plotting a future course: estimating future portfolio distributions
In the past this portfolio income report has included forecasts of future distributions broken down by the individual investment vehicle.
This particular analysis does not seem as useful in a period of flux around the payout structures of the main Vanguard fund.
Rather, the chart below sets out the 2024 quarter total forecasts compared to past actual distributions on the same quarterly basis.
This shows the general expected effect of the changes in the Vanguard funds, with a reduced payout in June and December, offset by larger ones in March and September.
Overall, the expected level of 2024 payouts using the mean average of past per unit distributions for all except the bond funds – for which a median value is used – is $86,800.
Setting out these estimates will give a sense of how the methodology performs through the year, and at the end of this year, also a gauge of whether progress matches earlier expectations.
Perspectives on the portfolio distributions: the view of portfolio ‘working hours’
In past entries I have discussed the perspective of the portfolio itself as a notional, silent, substitute ‘worker’, tirelessly generating income through the year.
The chart below shows the development of annual portfolio income over the journey, calculated on an hourly basis, i.e. the per hour ‘earnings’ of the portfolio, counting each and every hour of the year.
The second way to view the same data is by considering the ‘earnings’ of the portfolio within only normal working hours.
This assumes that the portfolio only produces earnings in hours in which an ordinary worker would – so it equates to approximately the standard pre-tax hourly ‘wage’ the portfolio is able to produce.
Over the last year, actual ‘per working hour’ earnings have been around $39.
Guarding against the clouds: using the portfolio distributions
Based on distributions announcements for the exchange traded funds A200, VAS and VGS and the December distributions from the Vanguard funds, there will be approximately $13,000 of capital available for use over the next two weeks.
This sum is less than the full half-year total reported above because September quarter distributions from a number of the funds and ETFs have already been paid and were immediately re-invested when paid across October. As noted, some elements of the Vanguard payments were also re-invested as part of the move to the new Vanguard platform funds.
I intend to set aside around 25 per cent of these payments in cash to meet future Pay As You Go Instalment tax liabilities.
My usual approach with the remainder (in this case around $10,000) would be to invest it in equal increments on a fortnightly basis though January to June.
This year, however, I intend to change this practice, and simply invest this amount as a lump sum, rather than defer it entering into the market. That is, to effectively abandon dollar-cost averaging the lump sum into the market.
The reason for this is simple, the absolute amount in question is low, representing about 0.5 per cent of the existing equity portfolio. This makes it relatively less important a question, than situations in which one was adding a sum equivalent to 10 per cent of the existing portfolio at one time, or averaging it in over time.
Additionally, I have previously taken the decision to reinvest similar sums in Quarter 1 and 3 immediately in full, to do otherwise would appear to be a triumph of mere habit over substance.
The lump sum investment be directed according to my current asset allocation plan, towards an equal exposure to Australian and global shares.
A stable anchor: the emergency fund level held steady
Since 2017 a regular task following finalising each half-year distributions estimate has been to review the required level of my emergency fund.
This fund is currently set at a level of providing the equivalent of one year of expenses equal to my Portfolio Goal target income of $99,000. It is designed to cover expenses in any unexpected periods without employment income or to help meet any major unanticipated expenses.
I determine how much cash is required for the emergency fund by reference to the gap between an estimate of average distributions and the target income (i.e the emergency fund is set equal to the portfolio target income minus expected full year distributions).
For this estimate, I typically seek to average the raw five-year average of annual distributions, and alternate estimate based on average per fund or ETF unit distributions, and long-term estimates of total distributions as a percentage of the portfolio.
These three approaches combined indicate likely forward distributions of around $86,000 per year that could be used in an emergency, leaving a gap or notional emergency fund ‘need’ of $13,000.
The emergency fund set in July last year was $16,000, and it is currently at this level.
Applying the approach of previous years, there is an argument for taking the excess $3,000 and investing it to meet the small deficit to the revised equity target. In recognition of the parallel priority, however, to build the emergency fund to a higher level as part of my third objective, I will not do this. Instead, I will leave the excess in the emergency fund as part of the first steps of this build up of required reserves.
Observations
The portfolio income report is probably reaching a turning point in its significance in the journey.
Originally, and over the past seven years, the reports have provided substantial motivation and regular proof of forward progress, especially in times when the capital value of assets could vary.
The psychological reward of seeing the portfolio income generally rise year on year, even as the portfolio might oscillate, was real and enduring. Similarly, seeing the portfolio income rise to close to actual spending levels, provided proof that – even with the caveats of some distributions being capital gain related – the income objective was drawing closer.
Now, however, the portfolio income report provides a more muted signal of progress. A rebalancing over time towards global equities has constrained the absolute growth in dividend payments.
As noted last year, when managing portfolio withdrawals using a safe withdrawal rate, the actual level of portfolio income received just becomes a number that affects what level of, or whether, actual capital withdrawals need to occur (or indeed whether some proportion of distributions need to be re-invested).
That is, portfolio distributions almost become part of an type of “error term”, in which the residual needs to be managed.
At the same time, the shift to greater quarterly distributions make biannual income reports less aligned to the structure and reality of the payments now being received.
A factor in considering the future shape of these reports is feedback from readers that they have found the detailed approach and consistency in data reporting through time helpful and motivating for their journey. Replicating the reports from these ‘safe’ past years may therefore be one possibility. Another is adopting and changing the format and cadence, to accommodate a quarterly or annual approach.
Looking ahead, formidable clouds do obscure the patterns of portfolio income to come.
While forecasts can be made, the record of the past few years shows that these need to be made humbly. Indeed, they can only ever be indicative of where distributions may be expected to land on average over time, rather than as an accurate estimate for a single year.
And so, now, nothing remains except to plunge into those cloud banks, and start to experience the rest of 2024.
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. Last financial year franking credits valued at approximately $14,000 were received from all shares, ETFs and Vanguard retail funds, bringing the total half year distributions on a notional ‘pre-tax’ basis to approximately $46,500.
For analytical simplicity some composition graphs exclude small income from smaller holdings such as IAG, NHF and Telstra, as well as Raiz, Spaceship and Plenti. The total income excluded by this approach constitutes less than two per cent of the total income received over the period.
Disclaimer
The specific portfolio allocation and approach described has been determined solely based on my personal circumstances, objectives, assessments and risk tolerances. It is not personal financial advice, or recommendation to invest in any particular investment product, security or asset, and investors considering these issues should undertake their own detailed research or seek professional advice.