August 2016 Dividend Income And Expenses
Summer is officially over. It went by far too fast here in the Pacific Northwest.
With epic clear blue skies and mild temperatures, the summer here is glorious. But it changes fast.
One day August was like J.R.R. Tolkien’s Shire — Sunny and 75F. The next day, instead of the Shire, we get Mordor! Suddenly we live in the Land Of Shadow again. I can almost see Mt. Doom from my house.
Torrential rain, grey skies and cold temperatures are once again a regular part of daily life. Don’t move to the PNW unless you enjoy that kind of weather. I can already see the leaves changing into the golden colors of fall.
So, enough lamenting the change of seasons — how did the month of August turn out financially?
Well, August was a month of inflation. How bad was it? Let’s find out…
Expenses For August
Inflation is one of my least favorite things in life — it’s an expense I can’t control.
In August we had inflation hit several of our regular expenses — the biggest of which was our mortgage. The mortgage is actually fixed interest rate, but it rises over time as property taxes increase. (Property taxes are included in the monthly mortgage bill)
In August, our mortgage payment rose to $2270.25, an increase of $132.25 from last month. A 6% increase!
Normally I don’t like to gripe about paying taxes, because they’re needed to keep life civilized. But when was the last time you received a 6% salary increase at your job? Never? Most people have to be content with only a 3% annual increase.
These kinds of big annual increases always rub me the wrong way. For myself, (and most people) our mortgage is by-far our largest monthly expenditure…and there’s very little we can do about it.
When property taxes go up faster than income does, the little guy gets squeezed. It’s absolutely no fun. I can only hope the value of my home increased at a similarly ridiculous rate. When I finally sell this money-pit of a house, I hope to get some of it back. (Money Pit is a great movie BTW!)
So how about the rest of our August expenses?
August totaled up to $4311.87. While that’s lower than July, it was still an expensive month.
If July was over-budget in the food department, August was the exact opposite.
Groceries amounted to $368. That’s pretty good. Like every other month, there was no alcohol included in the month’s expenses.
Normally we average $500 per month for groceries, so it’s good to see a lower than average month.
August also had some surprise home repair expenses that pushed the expenses higher — Our bathroom toilet started leaking water onto the floor.
After 30 years of rusting, the bolts that secured the toilet tank finally rusted through. While it wasn’t a serious leak, the problem needed resolving quickly before the situation got worse. We decided to replace the toilet. The toilet and water line amounted to $168.90.
Despite expenses coming in at $4311, I think we did a great job at keeping expenses under control in August.
Why? Without the property tax increases and the replacement toilet, our expenses would have been $4010. Right on-target with our budget.
Dividends For August
Unfortunately, August was a ‘dry’ month for dividends. Ho-hum! The taxable portfolio only managed dividends of $1,040.20, which is actually higher than previous ‘dry’ months.
As you can see, I’m no longer including a column for foreign tax adjustments — we sold off our Telus stock (more on this later) and won’t be needing to make these kinds of adjustments for foreign taxes anymore.
So, why the dry month? Most companies we own don’t pay out in February, May, or August. This creates ‘dry’ months throughout the year:
To counteract this problem we keep excess cash on-hand to deal with the low dividend months. So far we’ve only kept 6 months worth of expenses in our checking account, and this has worked out fine.
In the future, I may end up bumping our cash-on-hand to 12 months worth, but I haven’t decided if this is truly necessary.
August Investment And Portfolio Changes
Our dividend target for 2016 is $48k in dividends. As I mentioned last month, I’m worried we might not hit the target. Finding good investments is hard right now. The market might be overvalued. Almost everything looks expensive against historical norms.
This month, as I hinted at in “How To Be A Dividend King“, I decided to sell off our Telus shares. Given the financial state of the company and it’s low growth rates, I viewed the company as very fairly valued. We sold. I chose to use those funds to buy more of my favorite investment — The Well Known Energy Company (WKEC).
In August we invested an additional $125,630 into the WKEC. Roughly $33k of that was from our Telus sale, and another $56,250 was from a preferred share redemption in the second quarter. In reality, we only reduced our cash position by (roughly) $36k this month.
Last month I projected we needed to invest about $45k per month to make our annual targets. Clearly we didn’t make that in August despite some massive buys. Our 2016 dividend income is probably going to come up short of our projected $48k in dividends.
Investing With Conviction
Our investment in the WKEC now comprises 25% of our taxable portfolio (and growing). Some people might call me nuts for putting so much of our net-worth into just one company…well, I sleep very well at night. We’re buying into this investment with conviction.
Diworsification might make some people feel more comfortable, but it doesn’t interest me. It’s a recipe for poor returns. A quote from Warren Buffett sums up my feelings on the subject:
“I will only swing at pitches that I really like. If you do it 10 times in your life, you’ll be rich. You should approach investing like you have a punch card with 20 punch-outs, one for each trade in your life. I think people would be better off if they only had 10 opportunities to buy stocks throughout their lifetime. You know what would happen? They would make sure that each buy was a good one. They would do lots and lots of research before they made the buy. You don’t have to have many 4X growth opportunities to get rich. You don’t need to do too much, but the environment makes you feel like you need to do something all the time.”
Yes, like Buffett mentioned, I’ve done my homework with the WKEC. We’re taking a big swing at this one because I’m certain it’s going to work out well. The risk of permanent capital loss looks extremely low. It’s not really a matter of “if” it works out, it’s really a matter of “when”.
Our strategy is to invest a big chunk of capital, and then sit on it for a decade (or longer). For those who are curious — Yes, I’ve been down this road before.
In my lifetime I’ve used several of my ‘punches’ already. Montpelier RE was one such example, where I put massive amounts of our personal cash into one investment and then sat on it for a decade. The results were market beating. Dividends from the sale were excellent too.
Will the WKEC work out that well? The odds look very good to me.
[Image Credit: Flickr]
That’s quite a big bet. I’m impressed at your convictions. I personally want 5-8 dividend stocks. I can see the case for up to 20, maybe, but it feels too diffuse.
I’m pretty certain Buffet meant 20 stock picks in a lifetime, not 20 holdings at a time. He was arguing for concentration and taking the time to make good investments.
I was not suggesting that Buffet says to hold 20 different stocks. Only saying what I could consider doing personally.
Gotcha! 🙂 Thanks for the clarification ZJ!
Mr. Tako, although you had a “dry” month, it sounds like you adjusted just fine.
Interesting read on your 25% position into WKEC. Although I personally wouldn’t have the confidence to do that, you seem to be much better versed with the opportunity here. I suspect you’re pretty familiar with the cash flow of WKEC?
In some ways, it’s no different than me having a larger chunk of our NW invested in R.E. Some would think I’m nuts, but to a seasoned investor that understands the numbers, it’s a conservative risk.
I’m sure you’re looking forward to a “wet” month ahead. 😉
Yes, I’m intimately familiar with its cash flows! That’s a good point about the real estate investors — Many RE investors put up large chunks of their net worth to single properties…and frequently use leverage. By comparison, what I’m doing seems less risky.
Solid Month for you Mr. Tako, even for a dry month. Wish our dry months looked like this.
I have to admit, it is an investment strategy that does not resonate with everyone. However, considering your current net worth, with about 25% in one company and doing the buy and hold strategy, your overall risk is still manageable (i.e. you most likely do not have to go back to work if things do not turn out well). And you have a good chance of an upward movement in your overall net worth. Curious to see where this will go. All the best!
I didn’t know the rain came so soon in the northwest. We usually have a great fall but its followed by lots of cold and snow instead of rain.
Our mortgage also makes up a good chunk of our expenses and went up a bit this month to account for increases in insurance and taxes. At least home values are not dropping anymore.
I actually think the NW is getting wetter with global warming.
I will be reading along for your WKEC updates and rooting for you! I am always intrigued by the stock picking, but don’t have the stomach for it myself. At least not at this point in my life. I recognize that you can’t beat the market without taking some risks, though, so I will definitely be following along and pulling for you.
Thanks Matt! Without risk there is no reward!
It is so interesting how inflation varies from region to region. Our mortgage went down by $10 instead of up due to a decrease in our property taxes. I can’t count on that forever, but I’ll take it for now.
Hi Mr Tako,
You have an impressive amount of annual dividend income. I am glad to see you are living off dividends in retirement.
It is interesting to see people taking on concentrated positions. I sleep better at night, knowing I own a lot of companies from around the world. But I do know some that have bet big and won big ( though some have bet big and lost big too : -(
You may have discussed this before, but which one is this WKEC? In addition, have you discussed your portfolio holdings anywhere before?
Dividend Growth Investor
I’m keeping the actual company name confidential while I’m still buying. Other picks, like LYB, I’ve openly mentioned in the comments.
A “slower” month for you in terms of dividend income but your annual amount is pretty impressive. Damn a 6% mortgage payment increase? You’re right, you don’t see salary increasing that quickly.
We’re getting a bit of rain here in Vancouver BC too. 🙁
I like reading dividend income reports. Thanks for posting. Like many above, I will be waiting on updates for WKEC. Here’s to your continued passive income success!
Like others, I’m not super sure about your 25% stake in a single stock, but whatever works for you I guess. I think you’re right that there’s less potential return for people like me who dilute everything into broad stock, but there’s also less risk, I don’t have to “think” about my choices. Looking forward to seeing how it pans out for you!
To me it doesn’t seem risky at all. I feel more comfortable putting my trust into the hands of one CEO than hundreds.
Mr. Tako,
Is there a reason you don’t share the name of WKEC? I can probably guess the company name but I am curious to why you are so secretive about the company 🙂
Mostly because I’m still buying. 🙂
Hey Mr. Tako, I read this post a few days ago and woke up this AM thinking about it. Of course I am curious which WKEC you are investing in, but after looking over prices and dividend spreads for various energy companies, I can take some guesses. None of those guesses would lead me to take a 25% position on any of them. So, my hat is off to you for the time and energy that you put into research that gives you confidence to take such a position.
I wonder what is your horizon for buying a dividend stock? Do you anticipate riding it for 1 year, 5 years, 10 years? Most of the well known energy companies are big oil & gas companies. While these may have rosy prospects for 5 to 10 years, I for one am hoping that their 30-year prospects are crap. (Sorry if that is a political statement from a bike riding, infrequent small car driving, wind-powered home owning reader.) Besides having no time/energy or talent for stock picking, I like index investing because it allows me to own energy companies now while they are about to be profitable (again) and also own the competition that I hope will outpace them in the long run. So, my question is what is your horizon for a 25% position?
With greatest respect, Aperture.
At least 5 years, but would prefer more like 10 years. It’s really more about how the company performs rather than some investing time horizon target.
Due to the nature of the beast there are hidden cash flows that don’t exactly show up in the operating earnings. Those won’t disappear anytime soon, but it will take time for that value to be realized.
For a dry month 1000 is pretty good. You going Warren Buffett on the WKEC which is good I think.