Best Way to Invest a Tax Refund – Dividend Stocks

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I love a good money experiment every now and then. They are usually fun and provide a challenge that makes the world of personal finance a little more interesting.

One such experiment that my wife and I started last year was to track a collection of assets that we purchased using our tax refund. At tax time last year (2015), we took $5,000 from our return and built what is called the tax refund portfolio.

The tax refund portfolio is a collection of high quality dividend paying stocks, along with miscellaneous cash collected from dividends. The goal is to invest in top notch stocks that overtime pay a nice income stream.

We wanted to track the value and income generated from these funds to show the benefits of investing a large sum of money like a tax return. The portfolio will have ups and downs in the short term – which we witnessed last year. However, we believe that the long term return on quality dividend paying stocks overtime is the best opportunity to build wealth.

Instead of spending our tax return on things we don’t need, we are choosing a minimalist lifestyle and want to grow our wealth by purchasing assets.

Tracking Our $5,000 Investment

Our tax refund portfolio is just over a year old now. The value of the portfolio hit several peaks and valleys in that time. Over the last couple of months, it seems to have finally built a solid base.

This is because we have collected dividends which have been reinvested back into the portfolio. This simple little action allows us to compound the growth of the overall portfolio.

Most of the dividends earned last year have been reinvested into new shares of stock. The remainder balance sits in the portfolio waiting to be invested.

We are reinvesting everything we earn to compound our future income stream.

As noted above, we invested $5,000 of last years tax return (from 2014) into dividend stocks. Here is a look back at our initial investments last year.

Here are all of the initial purchases we made with the $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 – based on our rule for selling dividend stocks, we recently sold our entire position of BHP stock for $32.52 per share. That was a total loss of ($195.86).

We have since invested the funds from selling BHP shares into a new stock to our portfolio – Archer Daniels Midland (ADM). More details are below.

Dividend Income Earned

Since last reporting our portfolio a month ago, we have received the following dividends in May.

  • $10.01 – Caterpillar Inc. (CAT)
  • $6.17 – Realty Income Corp (O)
  • $20.88 – Omega Healthcare Investors (OHI)

Total May Dividends = $37.06

These recent dividends have pushed our total earned up to $213.55 since starting the portfolio over a year ago.

Current Portfolio Holdings

Using a combination of the dividends earned last month ($37.06), our previous cash balance ($21.83), and the balance from the sale of BHP ($520.32), we made the following purchases this month –

  • 14 shares of Archer Daniels Midland (ADM) = $554.68

This new purchase leaves us with a cash balance of $24.53 to use for future stock purchases.

At the time of this writing, these are the values of each stock that we have purchased.

  • ADM – $539.56 (14 shares @ $38.54)
  • CAT – $932.10 (13 shares @ $71.70)
  • EMR – $529.10 (10 shares @ $52.91)
  • O – $1,988.34 (31 shares @ $64.14)
  • OHI – $1,181.88 (36 shares @ $32.83)
  • Cash Balance – $24.53

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

Total Starting Balance – $5,000.00
Total Updated Balance (May 2016) – $5,195.51

Increase/Decrease = + 3.9%

The total balance for May is actually down compared to April by (1.9%). However, since starting the portfolio over a year ago, we are up by almost 4%.

These increases in value could certainly come tumbling down next week or the week after. But since we are investing in good quality stocks, we are not concerned at all if that were to happen.

On the really bright side – we are up by almost 4% even with our almost $200 loss on owning shares of BHP! This just goes to show you the power of diversifying your dividend income portfolio.

Increase in Future Dividend Income

Instead of concentrating on share prices and the portfolio value, we are more interested in increasing our future dividend income with this portfolio. By investing money in the companies listed above, we have increased our 12 month forward dividend income by $233.45!

The breakdown of stocks is shown below –

  • ADM – $16.80 (14 shares @ $1.20)
  • CAT – $40.04 (13 shares @ $3.08)
  • EMR – $19.00 (10 shares @ $1.90)
  • O – $74.09 (31 shares @ $2.39)
  • OHI – $83.52 (36 shares @ $2.32)

12 Month Future Dividend Income = $233.45

Since last reporting, our future dividend income actually dropped by ($8.16). This was basically due to the difference between the old yield for the BHP stock we owned compared to the yield of ADM. Nothing really to worry about here at all and we are looking forward to upcoming dividend increases by the stocks that we own.

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.

Based on our projected dividend income, our yield on cost for these investments is 4.67%!

YOC = $233.45 / $5,000.00 = 4.67%

2015 Tax Return Funds

Guess what? It is that time of year again. Just like we did last year, we are going to invest a large portion of our 2015 tax return into this portfolio.

We want to build on the solid base that we have created and keep that future dividend income growing! This is how real wealth is built – slow and steady.

In our next update, I will introduce the new funds into the portfolio so we can start tracking 2 years worth of tax return dollars hard at work.

We have already taken the first step this week and transferred $2,000 worth of assets into our Robinhood account. Our goal is to hopefully invest another $5,000 this year again, but we need to work out a couple things before we do.


The overall strength of our tax refund portfolio is solid. We have already increased our annual dividend income by over $200. With the additional tax return funds that will be added in soon, we will be pushing past the $400 mark in no time on our way to $500!

Even by taking a $200 loss on one of our original holdings (BHP), the portfolio has still managed to grow. This is a direct result of having a diversified portfolio of stocks along with earning dividend income. Most of the income that has been earned has already been invested back into the portfolio.

We expect to see solid results now into year #2 of this portfolio. It is exciting to finally see the value of compounding growth from the dividends that have been reinvested. That compounded growth will only get bigger in the next 12 months.

Have you given any thought of investing your tax return in dividend stocks? What stocks would you purchase if you were starting a portfolio like ours?

Full Disclosure – At the time of this writing, we owned shares in the following stocks noted in this post – ADM, 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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