The past year I have been trying to a lot more attention to my investments, how they pay out dividends, how they appreciate in value and all the little account fees etc. In a recent post I mentioned that I now have the dividend earnings from my investments get deposited directly into a separate account (call a sweep account) in order to see it accumulate, to make it a more tangible experience.
In this post, I just want to review the process and highlight how fucking awesome it is to see money get deposited in my account without me having to continue to work for it.
My Brokerage Account Investments
I raided my brokerage account once about 2 years ago in order to buy my primary residence, my condo, in cash. I discussed this with my financial adviser first and our plan was for me to get a mortgage on it if possible – I wasn’t able to get ideal terms on a mortgage and decided to cash out the account.
The current balance is back up to around $138,000, up from the $40,000 that was left behind after the raid.
This money is invested in 4 index funds. An international equities fund, a US equities fund, an emerging market fund, and some tax-exempt bonds.
If I hadn’t raided my brokerage account for that condo, I would have closer to $300,000 and I’ll talk about why that’s so important, later in this post. However, I would also still have a mortgage and that wouldn’t mesh well with my financial standards.
$880.25 Of Income From 4 Funds
My investments offer me a yield every quarter, 4 times a year. This is the first time I am really tracking my dividend earnings and in the middle of this month (June) I got a total deposit of $880.25 in my sweep account. I gotta tell ya, I’m absolutely stoked about this $880.25 just showing up in my account. That’s a LOT of money – to me.
Each of my 4 index funds has different yields, as I’ll get into more below. So I had the following deposits into my account separately:
- $196.20 (VEMAX)
- $502.34 (VTIAX)
- $150.29 (VTSAX)
- $31.42 (VMLTX)
That’s a total of $880.25. I would have to work approximately 5 hours based on my current income to earn $1,467.08, then pay taxes on this in order to be left with what I made in my dividend income.
When I was working full-time, my take home was $90/hour on paper and about $40/hour after all the “work expenses” were accounted for. So I would need to work somewhere around 15 hours to make that dividend income. Fifteen hours people!! Fuck…
$880.25 is 0.65% of $136,376, the balance of the account at the time of dividend payout. What’s really important about this is that the percentage generally stays the same regardless of how much I have invested.
My regular physician readers aren’t following a very traditional physician lifestyle. Their expenses are based on their financial goals – more income doesn’t mean more spending for this savvy group. And that’s exactly why a fixed percentage return is so incredibly powerful.
If I hadn’t raided my brokerage account 2 years ago, I would have $300,000 in that account now. 0.65% of $300k is $1,950 – and that’s every fiscal quarter, 4 times per year.
How Each Fund Performed
This might be less interesting because it’s going to be different for different folks. Each of us has their own portfolio preference based on their risk tolerance and what investments they are comfortable investing in.
My VEMAX, which is an emerging market index fund, earned me 0.62% in this quarterly dividend earnings.
VTIAX, which is my broad international stock index fund, earned 1.07%.
VTSAX, which is my broad US stock market index fund, earned me 0.46%.
And finally VMLTX, a tax-exempt municipal bond index fund which earned me 0.12%.
Of course, I have different amounts of each so the weighted percentage is different. I feel quite comfortable with my asset allocation so I won’t be making any major changes. However, since my bonds are dropping in value and my equities are going up, I will be contributing the majority of my future investments towards my bond fund in order to maintain my desired asset allocation.
What This Number Means To Me
I can see my buddy’s dad rolling his eye that I’m excited about earnings from index funds. He’s an incredibly successful business guy, he hustles hard for his money and doesn’t trust it to anyone else. However, what works for him won’t work for me because I am not willing to take on running a business empire.
$880 every 3 months would come out to around $3,500/year. I would still owe some taxes on this income – somewhere in the 15% range at my current income. Though, once I get my income below $50k, I should be able to pay 0% on qualified dividend income and long-term capital gains from selling appreciated investments.
$3,500 would pay for all my housing expenses: property taxes, and HOA dues. This is the first expense that came to my mind because it’s my main ongoing, required expense.
As I was writing this post, I realized that in my previous ‘Income’ posts I never mentioned my income from dividends. I guess that’s the reason I started tracking my investments better – we tend to think of our investments as an obscure retirement vehicle, when in fact it’s making money, right here and right now.
A Perspective on 2.5% Dividend Earnings
It’s understandable to consider 0.65% every quarter, or 2.6% a year, to be a very pathetic return on your investments. As physicians, we are used to comparing our efforts and return on efforts to that of the average person.
Comparing The Returns To Others
If the average person works 40 hours a week and earns $50k/year then we want to be making 5x that – at the very least. After all, we have spent many extra years in school, have much risk practicing our profession and deal with human lives.
When it comes to returns on investments, sadly all of us are on an equal playing field when it comes to the average rate of return. Unless you are willing to invest in far riskier securities investments, the rate of return for the same investments will be … the same.
The High Earning Physician Has A Unique Advantage
However, physicians have the advantage of a high income, allowing them to feel a bit more comfortable with having their money invested in the market while many are paralyzed by even the littlest of risk taking and so keep their money out of the market altogether.
We also have the ability to earn a lot more and save a lot more of our incomes. It’s this money which can get invested and earn us a return. Sure, 2.6% still seems like nothing – but once you account for an ever-growing investment balance and compounding investment returns, it’s quite powerful.
A young doc with $100k invested will see 2.5% if they have a similar portfolio as mine. They will lose 15% of this to taxes if invested in an after-tax private brokerage account – so they would have an after-tax return of 2.13% in dividend yields, or $2,130 of earnings that year.
The Returns Compound
Later in their career, they will have a balance of $250,000 and earn $5,325. And a few years after that they will have $500k and earn $10,650 a year. Eventually, most responsible physicians will have investment accounts with at least a million dollars, which means $21,300 a year of income, straight into your pockets.
Also note, this doesn’t account for appreciation in value of the account balance. Dividends are a return on your investment. I will earn the dividend yield of 2.5% a year and my investments will hopefully/likely keep going up in value.
Finally, on top of the dividend earning and investment appreciation, you get to reinvest your dividends. So every year when my account balance increases, so does my dividend earnings. Every year, I get to reinvest more dividend earnings back into the account. More money, making more money, making me more financially secure and less reliant on income from a job.