Thursday, January 19, 2017

My 2017 Roth IRA Contribution and Stocks I Bought and Sold

I made my $5500 maximum contribution toward my Roth IRA for 2017. This is the same limit for five years in a row now without any increases, which is a little frustrating.

In my Roth IRA account, which is tax-free, I implement a high-yield dividend growth strategy: Dogs of the Dividend Aristocrats (DoDA). Similar to the Dogs of the Dow, which are the top ten yielding stocks in the Dow, DoDA are the top ten yielding stocks among the Dividend Aristocrats, stocks in the S&P 500 that have increased dividends every year for the last 25 straight years.

Dividend Aristocrats are arguably the highest quality stocks available, and the higher yields are correlated with better valuations and higher expected returns. Dogs of the Dividend Aristocrats should be an improvement over Dogs of the Dow in quality and selection.

I am using my IRA to invest in higher yielding dividend growth stocks to balance out my taxable accounts where I invest in more tax efficient stocks with lower dividend yields.

2017 will only be the third year in which I implement this strategy. The table below shows the 10 highest yielding dividend aristocrats at beginning of the year. Red highlights stocks that were no longer part of next year's list. Orange highlights stocks are newly added to this year's list compared to last year, but no longer part of next year's list. Green highlights stocks that are newly added to this year's list compared to last year. The average yield has been almost twice that of the S&P 500.

Stock (yield)
Year12345678910AvgS&P 500
2015T5.60%HCP4.60%CVX4.10%ED3.80%MCD3.70%CINF3.40%NUE3.30%EMR3.10%ABBV3.10%XOM3.10%3.78%1.93%
2016HCP5.85%T5.50%CVX4.69%ED3.99%EMR3.92%ABBV3.84%NUE3.71%XOM3.69%PG3.30%WMT3.19%4.17%2.21%
2017HCP4.93%T4.85%ABBV4.16%ED3.76%CVX3.73%EMR3.41%KO3.33%XOM3.31%KMB3.21%PG3.17%3.79%2.00%

In my IRA account, NUE and WMT from 2016 are replaced by KO and KMB in 2017. I also added to a few holdings with lower weights for rebalancing. My updated portfolio now reflects these changes.

The following table lists the annual total returns since I started the strategy. Returns correspond to each of the stock if bought at the beginning and sold at the end of the calendar year. My IRA returns are close to the average return of the 10 stocks, but not exactly the same due to small differences in prices and weighting.

Annual Total Return (%)Cumulative Returns
Year12345678910AvgSDIRAS&P 500AvgIRAS&P 500
20158.30%-8.00%-16.20%1.40%30.40%19.00%-14.90%-19.70%-6.50%-12.80%-1.90%16.54%-1.40%1.20%-1.90%-1.40%1.20%
2016-9.40%29.80%36.50%18.80%20.90%9.80%52.00%19.80%9.30%16.00%20.35%16.64%20.45%11.93%18.06%18.76%13.27%

The strategy did outperform the S&P 500 on a total cumulative return basis by 479 basis points in 2016, which is encouraging. A ten-year study from 2005-2014, however, found this strategy to have underperformed both the Dividend Aristocrats (DA) and the S&P 500. This study period included the financial crash in 2007-2008 and the DoDA loaded on financial stocks in 2007. I am hopeful that the cleansing has been done now, and that the DoDA is now higher in quality and positioned for outperformance over the next decade. Meanwhile, I'll keep my eyes open and will readjust strategy if necessary.

Sunday, January 1, 2017

My Net Worth Update - End of 2016

My net worth increased from $643,161.31 to $883,575.44 from 12/31/15 to 12/31/16. In 2016, I had a surplus of $143,506.88

Organic growth = ($883,575.44 - $143,506.88) / $643,161.31 -1 = 15.07%.

Inorganic growth = $143,506.88 / $643,161.31 = 22.31%.

Total net worth growth = 15.07% + 22.31% = 37.38%.

Organic growth corresponds to growth in my net worth without infusion of new money from surplus; inorganic growth corresponds to growth due to new money infusion.

Ideally, I would like to see my net worth increase primarily from organic growth, to be sustainable in the event I no longer have earned income. My return was satisfactory in 2016, although inorganic growth was a more significant contributor to my net worth growth.

My liquid net worth of $734,012.06 is currently 83% of my net worth. My net worth is comprised of 3.1% cash, 1.4% bonds, 70.8% stocks, 23.4% tax-deferred retirement account (essentially all invested in stocks), 1.4% gold, 0.6% other assets, and -0.8% debt. My retirement accounts make up 26% of my net worth. My leverage is 101%, which is extremely conservative. This will give me some flexibility to increase leverage when the next bear market comes.

Income & Expenses For December 2016

Since 2014, I have been tracking my monthly income and expenses. You can see a breakdown of every penny I earn and spend. For perspective, this budget is for a household of two in a small US city. By documenting my journey, I aim to demonstrate the feasibility of saving a significant portion of your income and provide some ideas and inspirations for your own budget.



Below are my income and expenses for December 2016 and the full year. You can see all my monthly budgets here.
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Dec 2016Cum 2016
Income
Wages$10,061.76$148,180.63
Dividends$2,051.67$13,391.84
Other Income$2,816.60$16,472.57
Total Income$14,930.03$178,045.04
Expense
Federal Income Tax$1,019.16$15,473.37
Federal Tax Pmt/(Refund)$3,609.15
FICA-SS$418.22$4,755.60
FICA-Medicare$97.85$1,112.20
Rent$450.00$5,400.00
Student loan repayment$160.47$1,919.76
Grocery$108.35$852.37
Gasoline$79.24
Car Insurance$257.65
Car Reg/Tax/Maint$20.00$79.99
Cell phone$12.87$189.59
Electric$27.92$396.75
Clothing/laundry$10.81$76.31
Donation$13.00
Amazon sale costs$9.01
Ebay fee$3.50
Other Expense$156.18$310.67
Total Expense$2,481.83$34,538.16
Ex-Tax Total Expense$946.60$9,587.84
Surplus/(Deficit)$12,448.21$143,506.88
Before Tax Saving Rate83.38%80.60%
After Tax Saving Rate92.93%93.74%

Income
Wages remain my primary source of income by far.

Here is a chart of my dividend income by month for the past 13 months:
Total dividends for the trailing twelve months: $13,391.84, up 13% from $11,888.42 last year. 

Expense
Expenses are a bit higher this month due to other expenses of $156.18. I had to pay $100 to maintain my licensure and another $56.18 to replace an old microwave that finally decided to yield its ghost after over 10 years of usage. I also had to pay $20 for annual auto registration. The other expenses are fairly typical.

Total expenses for the trailing twelve months: $9,587.84.
Dividend to expense coverage ratio = 1.40, which is sitting at an all-time high.

Savings
My after tax saving rate was 92.93% for the month of December and 93.74% for the full year of 2016. I have exceeded my 90% savings goal this year. 
Thanks for reading. Happy New Year!