Paying My Bills With Dividends - Q4 2018 Update

by: DJ Habig

My goal of full income replacement is decades away.

Turning bills into dividend income goals provides intermediate goals that are easier to visualize.

By reaching a couple of these goals already, I feel more motivated and more accomplished as an investor.

With the end of the year and fourth quarter, I wanted to provide an update on my progress towards my long-term goal of full income replacement. Because I am still relatively young, I plan to use the power of compounding and DRIP plans along with regular capital infusions to reach this goal over several decades. I've been using individual monthly bills as benchmarks to measure my growing income stream against. Setting these smaller, shorter time frame goals serves as motivation for me to stick with my plan.

As stated in my last article, "Paying My Bills With Dividends - Q3 2018 Update", the next income goal I've been working towards is our cell phone bill which is $107.04 per month for a quarterly goal of $321.12. I also want to measure my individual portfolio's performance against an ETF, and I've been using iShares Select Dividend ETF (NYSEARCA:DVY) for comparison.

For Q4 2018, my income totaled $258.24, which was an increase of $21.98 or over 9.3% from Q3 2018. Going back to Q4 2017, I've had dividend growth of $71.03, or just under 38%. While I'm pleased with this increase, it does leave me short of my quarterly goal by about $63. However, if my portfolio keeps up this rate, I will reach it by Q3 2019. The increase during this past quarter was driven mainly by new positions in 3M (MMM), Cardinal Health (CAH), and Lockheed-Martin (LMT). I also added to existing holdings of Pepsi (PEP), AT&T (T), and Exxon (XOM) while getting a raise from McDonald's (MCD). A small percentage of the increase also came from the dividends from the fractional shares that were reinvested last quarter.

To compare my portfolio to DVY, I simulated converting my entire portfolio to shares of DVY on September 26th, 2018, to capture the fourth quarter's dividend. This transaction would have left me with 350 shares of DVY after backing out transaction costs. Those shares would have led to Q4 dividend income of $300.65, outpacing my performance by over 16%. However, DVY is far from a consistently rising dividend payer. In fact, their dividend pay dates move around enough that they paid a second dividend in Q4 that would've meant my same 350 shares earned only $264. My portfolio paid just over 2% less than that, which certainly makes me feel better about its performance. Because of the massive tax liability a full liquidation of my portfolio would incur, coupled with an ETF that varies its dividend payment, I am completely happy with my self managed portfolio and its progress.

I already mentioned my next goal of $321.12 which I've made progress towards that wasn't factored in to my Q4 income. During the sell off in December, I added more shares of Cardinal Health which will bump my Q1 2019 income for that holding. I will also be adding new capital to my portfolio which I will have to decide how to allocate. Johnson & Johnson (JNJ) finally looks attractive enough for me to add to my existing position and the recent sell off of Apple (AAPL) is intriguing. To push myself a little bit, I want to reach my goal with the income from Q2 2019, but whether I get there or not is inconsequential. It's all just a little game I play with myself to stay focused on my decades long goal. Thanks for reading.

Disclosure: I am/we are long CAH, JNJ, XOM, MMM, MCD, LMT, T, PEP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.