Category Archives: Passive Income

How to track dividends for stock market index funds

“It pays dividends” – This is a fairly common saying which means that there will be a reward if we put a lot of effort into an activity or purpose. However, depending on the particular activity, it is not always possible to visualise these rewards even though they may not be abstract. A good example of this is the dividends paid by Accumulation stock market index funds.

Accumulation class funds do not directly pay out dividends to the investor as opposed to Income class funds which distribute dividends as a direct cash payment to the fund investor. Instead, dividends for accumulation funds are rolled up and automatically reinvested in the fund, resulting in an increase in the price of the stock.

Even if this automatic process is an efficient, hassle free and reasonable way to grow one’s portfolio over time, the lack of visibility may make it seem as if little or no progress is being made. Most investment platforms do not have a way of showing what happens with these dividends and minimal information is available elsewhere.

To overcome this lack of clarity, I recommend regular tracking of dividends and recording the information in a tracker document. The process is quite simple and needs to be carried out once every few months or yearly depending on the dividend dates. Once the results are available it will be possible to identify trends like how much income your investments are producing and the actual dividend yields of index funds. Here is an outline of the steps to use:

Step 1: Find the data for the index fund

For the initial step you can use a investment data provider like Trustnet, Morningstar or your investment platform to analyse dividend and share price history for a particular fund. As an example, I will use the Vanguard FTSE UK All Share Index fund, a fund which tracks the performance of the UK FTSE All Share index. On Trustnet you can find the index you are interested in by selecting its characteristics on the drop-down menus and performing a search as shown below:

index-fund-dividend-tracking-trustnet

Using Trustnet to find investment fund data

Step 2: Analyse historical dividend and share price data

The next step is to analyse the relevant fund data. Trustnet provides a host of information on the fund including tracking error, price, charges, performance charts, top company holdings, sectors, diversification, fund size and dividend history. Explore all tabs to identify these metrics.

Vanguard FTSE UK All Share Tracker 5 Year Performance

However, we are only interested in the information on the Dividends tab. After navigating to the dividends you will be presented with a history of the latest dividends issued by the fund. Useful metrics shown are dividend amount, ex-dividend date and payment date. The dividend amount is the amount paid per share unit of the fund. Ex-dividend date is when the dividend was declared.

Payment calculations are based on how many units were held on the ex-dividend date. Payment date is when the payment is actually made. As shown in the table, the dates occur at regular intervals while the dividend amount varies. A yearly date applies to the fund in our example.

Index fund dividend history

Step 3: Calculate and record actual dividends

The final step is to determine the actual amount of dividends generated by your index funds. To make this calculation use the following formula:

Dividend “paid” = Dividend Amount x Number of units held on ex-dividend date

For example, if 25 units of the Vanguard FTSE UK All Share Index Fund (Accumulation) were held on 1st November 2016, the dividend “paid” on 30th December 2016 will be about £150. It is useful to store all this data for all your funds in an Excel or Google Sheets document for analysis and reference.

Stay the course and keep on investing

Continual tracking of such metrics for index funds makes it a lot easier to visualise the benefits and power of passive investing. The magic of compounding will also be displayed as the regular dividends will grow dramatically from one period to the next, particularly if regular investments are made by paying in new money.

It can be argued that dividends, a guaranteed potential source of passive income, are more powerful than capital growth when it comes to long term investing. Therefore, keeping an eye on dividends will provide the needed motivation and ease the path to financial independence.

Top articles on investing

Lessons from Berkshire Hathaway – Build a business and invest in stocks to grow wealth faster

Berkshire Hathaway meetingAs today is the 6th of May it is one of my favourite days of the year. This is because the 2017 Berkshire Hathaway Annual Shareholders meeting will be held in Omaha, Nebraska at the Centurylink Center. Thousands of diligent investors will turn up to witness Warren Buffet speak and as always, the Oracle will provide long lasting insightful financial advice suitable for all.

This year’s meeting will be webcast live on Yahoo.

Listening to Buffett has made me realise that it is possible to emulate his great success by using a two pronged approach for generating wealth through carrying out business activities and concurrently investing in the stock market. Such an approach, where excess profits from business activities are reinvested in stock investments will certainly supercharge cash generation and enable the investor to achieve their goals more effectively.

Run a real business

According to Buffett, Berkshire prefers to wholly own businesses such as BNSF, See’s Candies and Geico to common stock investments for a number of reasons. Running a business does not necessarily mean being heavily involved and spending many hours working on the venture. Cash can be generated by side hustle activities such as Amazon FBA, eBay, AirBnB, rental properties, Etsy, selling Private Label products, blogging or producing online products. Find your niche and apply your skills at what you enjoy doing and are good at.

Invest in stock index funds

The top five common stock investments in Berkshire’s portfolio are the American Express Company, Apple Inc., Charter Communications Inc., The Coca Cola Company and Delta Airlines. You can build your own portfolio of high quality company stocks by investing in low cost index funds.

Initially, business profits can be reinvested in the business to expand your offering and to get established in your chosen space. Later the profits can be invested in stocks to offer diversification of your overall holdings while providing truly passive income. I believe that a dollar of passive income is worth at least two of active income.

Avoid analysis paralysis and take action

The important thing is to not overthink your business or investing ideas. Instead, make a plan and execute it in the most effective way possible. Delays in getting started can lead to huge opportunity costs in the long run or worse, not doing anything at all. You can start by testing the waters through minor investments and then increasing involvement when more confidence is gained. Do not wait for the perfect outcome; just do it.

By applying both business activities and investing wisely it will be possible to achieve your financial goals. Don’t forget to watch the Berkshire Hathaway annual meeting. Streams of the latest meeting will also remain available on Yahoo Finance.

Top articles on investing

Earn Passive Income by using Index Funds

passive income index fundsPassive income is defined as income which is obtained by applying a “hands-off” approach, where minimum or no work is required to manage the assets that produce the income. The main benefit of having sources of passive income is that you can use time, the most precious commodity, to engage in other enjoyable pursuits or for generating income in other ways instead of focusing on one activity only.

Index Funds Investing

I am developing other methods of generating passive income but my preferred way is by using Index Funds. An Index fund is an investment fund that aims to track the performance of a particular stock market, for example the FTSE 100, S&P 500 or Nikkei 225.For UK investors, index funds can be held in an ISA (Individual Savings Account). A detailed guide for opening an ISA is provided here.

Index funds are passively managed and do not aim to “beat the market” as opposed to actively management funds which have objectives of outperforming the market. When you buy an index fund you buy actual portions of the companies held within the fund so it is important to think like an owner. Picking individual companies is out of the question due to the risk caused by lack of diversification.

The main benefit of index funds is that they are less costly to own than actively managed funds due to absence of the high trading costs, frictional costs and excessive management fees charged by fund managers. Index funds have also been proven to perform better than actively managed funds in the long term.

Warren Buffett on Index Funds

Warren Buffett, the greatest investor of all time, recommended that most people will do well if they invest in a portfolio of passively managed index funds. In the 2013 Berkshire Hathaway annual letter to Shareholders on page 20, Buffett says the following with regards to his estate:

“My advice to the trustee couldn’t be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors — whether pension funds, institutions or individuals — who employ high-fee managers.”

“The Bet”

In 2007, Warren Buffett made a $1 million bet that over 10 years, an index fund based on the US S&P 500 would perform better than actively managed hedge funds. The bet is administered by Longbets.org and its details can be found here. He provides a commentary on the background of the wager in the 2016 letter to Berkshire Shareholders on page 22:

“Subsequently, I publicly offered to wager $500,000 that no investment pro could select a set of at least five hedge funds – wildly-popular and high-fee investing vehicles – that would over an extended period match the performance of an unmanaged S&P-500 index fund charging only token fees. I suggested a ten-year bet and named a low-cost Vanguard S&P fund as my contender. I then sat back and waited expectantly for a parade of fund managers – who could include their own fund as one of the five – to come forth and defend their occupation. After all, these managers urged others to bet billions on their abilities. Why should they fear putting a little of their own money on the line?”

Buffett has been winning the bet so far. Nearly 10 years in, the Wall Street Journal video below reflects on the latest numbers.

Example Index funds

Below are good examples of index funds that could be used by a UK based investor.

UK Index funds – Data is accurate as of February 2017. Currency used is GBP.
FundAnnual feesYield5 Year Annual Performance
Vanguard FTSE U.K. All Share Index Unit Trust0.08%3.33%9.19%
Vanguard US Equity Index0.10%1.34%18.64%
Vanguard Japan Stock Index0.23%1.58%11.99%
Vanguard U.K. Government Bond Index0.15%1.67%4.45%

As you can see, considering only the dividend yield provided, the return on these index funds would have been greater than that from cash savings accounts over the last 5 years, especially taking into account the prevailing historically low interest rates. Over the long term, investors are expected to do well as long as they keep costs low and minimise trading.

You will have noted that I only use Vanguard index funds. This is because Vanguard operate a unique structure where investors in their funds are also mutual owners of the company. Therefore, I believe that the company has the best interests of investors in mind.

Focus on costs

Vanguard also tend to have the lowest cost funds in the industry and the company were among the pioneers of the index fund in the 1970s. I also admire the founder of the company, John C. Bogle, and invest by his principles. I strongly recommend the following book by Bogle. You can click on the link/ image to purchase the book from Amazon.

The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns. John C. Bogle.

All you need to know about index investing in a concise, compact and easy to read package. Other valuable book recommendations and reviews are available on the resources page.

Portfolio withdrawal – 4% rule

Once you have built up a diversified portfolio of a reasonable size, you will be able to withdraw up to 4% of it with a very low probability of depleting the funds over a period of over 30 years. The use of this safe withdrawal rate has been proven by different research findings including the 1998 Trinity Study, an influential paper by 3 Trinity University professors, upon which the 4% rule is based.

How much do you need to retire early

To hit the early retirement figure, you need to ensure that your portfolio is large enough such that a 4% withdrawal or income from it can cover your annual expenses. The formula to use is as follows:

Financial Independence Portfolio = 100/4 x Annual Expenses

This is not a get rich quick scheme. From my experience, it requires dedication, discipline and many years to accomplish. Put in the hard work now and reap the benefits later.

If you set goals, spend smartly, maintain a high savings rate and invest all this will be possible.

You might also like:

Essential reading: