Tax Refund Portfolio Update #3

Tax Refund Portfolio

As long as I can remember, my wife and I have gotten back a hefty tax return each year. That money was always used to help invest in our kids 529 college savings plans. That was until this year.

This year we decided that our kids future college savings were building up nicely. We opted instead to use the funds to build more dividend income. We have a goal this year to earn $1,500 in dividend income and in order to reach that goal, we need a little help from our tax refund dollars.

We decided to invest $5,000 of our tax refund into dividend stocks. This type of investment will certainly help boost our dividend income earnings for this year and many years after.

In order to show the growth of this $5,000 investment, we have started to track our – Tax Refund Portfolio.

Each month, we will give a detailed update on the status of the $5,000 investment. From the value of the overall portfolio to the cash balance and dividends coming in – it will all be covered.

These results will also be included in our overall Money Sprout Index reports that are updated at the beginning of every month.

$200+ Increase in Annual Dividend Income

We originally estimated that by investing an additional $5,000 in quality dividend paying stocks, we could increase our annual income by $218.50. This increase was estimated based on our average yield on cost for companies found in the Money Sprout Index (4.37%).

As you will see below, our future 12 month dividend income is actually higher than originally estimated. Of course, these are just projections of future income – not guaranteed results.

We are assuming that the companies we have invested in are not going to lower or cut their dividend from the current yield. There is actually a very good chance they all will increase their annual dividend over the next 12 months which means more growth for the Money Sprout Index!

In fact, one of the companies that we own just gave us a 10% raise this month! Details are below.

Tracking Our $5,000 Investment

We plan to track our $5,000 investment (from our tax return) here each month to show the power of investing in dividend stocks. This month was not a very good one for the tax return portfolio – at least on paper it wasn’t.

All of the shares that are bought or sold with these funds will be tracked and highlighted each month. The goal is to show the progress over time (years not months) of how $5K can grow if invested properly in quality dividend stocks.

Here are all of the purchases we have made to date with our $5,000 investment –

  • BHP Billiton Ltd. (BHP) – 16 shares @ $44.76 = $716.18
  • Caterpillar Inc. (CAT) – 12 shares @ $86.82 = $1,041.84
  • Emerson Electric (EMR) – 9 shares @ $58.94 = $530.46
  • Realty Income Corp (O) – 31 shares @ $46.19 = $1,431.93
  • Omega Healthcare Investors (OHI) – 35 shares @ $35.96 = $1,258.70
  • Cash Balance – $20.89

Note – We have received $9.44 in dividends to date since starting the portfolio. These funds will be added to our cash balance and eventually used to purchase more stock.

At the time of this writing, these are the values of each stock that we have purchased along with the percentage increase or decrease.

  • BHP – $614.40 (16 shares @ $38.40) – down 14.21%
  • CAT – $980.28 $1,058.04 (12 shares @ $81.69) – down 5.91%
  • EMR – $483.84 (9 shares @ $53.76) – down 8.79%
  • O – $1,424.45 (31 shares @ $45.95) – down 0.52%
  • OHI – $1,235.50 (35 shares @ $35.30) – down 1.84%
  • Cash Balance – $30.33 – up 45.19%

Note – Keep in mind the value of these stocks is at a point in time from the past and is already outdated.

As you can tell from the data above, we are down a good bit in this portfolio. The market has been very volatile lately, so we are seeing a ton of red right now.

Total Starting Balance – $5,000.00
Total Updated Balance (July) – $4,768.80

Increase/Decrease = -4.62%

Am I concerned about the (4.62%) loss so far? Not at all. It is actually a great opportunity to buy some quality stocks on discount as the market swings up and down. Buying great companies at a discount is actually a really good opportunity.

I recently wrote about the importance of building a foundation of dividend stocks when the market drops. This seems like a great opportunity to invest more funds. As a dividend income investor, I am not too concerned about the actual value of my stocks based on the current price per share. I am more focused on the income and future dividend growth potential of these stocks.

The further these stocks drop in share price, the more assets we can add to our portfolio!

Increase in Future Dividend Income

Instead of focusing on current share price and the value of our stocks, I would like to highlight the real purpose of building this portfolio – future income.

I am more interested in increases to our future dividend income over current value of the stocks. We are long term investors and have no plans to sell our stocks anytime soon. The losses noted above are simply those on paper.

The reason for investing in high quality dividend stocks is not to buy and sell. It is to buy, collect tons of dividends, and reinvest to earn even more dividend income.

By purchasing the 5 companies listed above, we have increased our 12 month forward dividend income by $239.84! The breakdown of stocks is shown below –

  • BHP – $39.68 (16 shares @ $2.48) – no change
  • CAT – $36.96 (12 shares @ $3.08) – up 10.00%
  • EMR – $16.92 (9 shares @ $1.88) – no change
  • O – $70.68 (31 shares @ $2.28) – up 0.44%
  • OHI – $75.60 (35 shares @ $2.16) – no change

12 Month Future Dividend Income = $239.84 (up 1.55%)

Note – It is important to point out that these calculations are no guarantee of future income. The numbers are estimated on the current dividend yield of each company.

As you can see from above, we got a nice 10% raise this past month from one of our stocks (CAT) and a slight increase in a second (O). When was the last time you got a 10% raise from your job?

Based on our projected dividend income, our yield on cost for these investments is 4.79%! I will take that rate of return any day compared to the 0.75% we are earning in our savings account.

YOC = $239.84 / $5,000.00 = 4.79%

Final Thoughts

It is important to note that all of our purchases for the tax refund portfolio have been made through our zero commission brokerage Robinhood. We are basically saving money on each investment since we are not paying any commissions or fees when we purchase these stocks.

Each month we will continue to provide updates on our tax refund portfolio to show the progress it is making. To many outside observers, the past months big losses may raise a concern. While we certainly don’t like to see a lot of red in our portfolio, we also have committed to investing for the long term and don’t mind short term hiccups.

It is these short term corrections that will help our family and yours build wealth.

Do you invest your tax refund or other windfalls of money that you may receive throughout the year?

Full Disclosure – At the time of this writing, we owned shares in the following stocks noted in this post – BHP, CAT, EMR, O, and OHI. The material above is not a recommendation to buy. Please do your own research on a company before deciding to invest.

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