For most of us, the work for the salary cycle is our daily sustenance. However, the truth of the matter is that there are other ways to generate individual cash flow-through investments so that you don’t have to work an 8-5 job ever again, passive positive cash flows.
Why create a positive cash flow portfolio?
Why leave the comfort of a steady monthly paycheck for the “uncertain” world of investment? Positive passive cash flow income by nature results in much more gain at a lower cost, both in expenses and maintenance effort.
Investing $10,000 in the SPDR fund at the beginning of 2021, this $10,000 would have earned $3542 in five-month (an expense ratio of 0.12% and YTD return 35.42%).
The fund manager takes care of the ETF and the associated investment headache while you earn from the comfort of your couch. Similarly, creating positive cash flow from the stock market, bond market, mutual funds market, and real estate has the same effect, not to mention other benefits such as tax breaks-depending on the investment asset chosen.
Why bother with positive cash flow?
Positive cash flow investment is short-term in nature and is an avenue for settling bills, building an investment portfolio consistently, acquiring reinvestment funds, and settling loans.
What to start?
To correctly draw up an investment portfolio, you need to understand:
- What are your goals?
- For how long are you willing to invest?
- What level of risk are you prepared for?
- What results do you expect from your investment portfolio?
- How much time are you ready to devote to portfolio management?
- What instruments can help you?
What instruments can help you generate stable income?
To achieve financial freedom through only one stream of income, salary, is next to impossible. However, coupling investment in bonds, dividends, stocks, real estate, and ETFs with a salary income can lead to financial freedom and ultimately eliminate the need for white and blue-collar employment.
There exists a fallacy that bonds are lower yield investment instruments than stocks. The truth of the matter is after inflation adjustment on the returns, and the difference is at most 2%. Despite being longer-term investment instruments, a diversified portfolio of short-, medium- and long-term bonds can lead to a stable and consistent income-bond ladder.
This diversified portfolio can include government bonds, corporate bonds, and municipal bonds. The bond ladder structure ensures yearly bond maturity, in addition to the periodic interest rate income, hence portfolio diversification and opportunities for interest rate readjustment on reinvestments.
High yield bonds also offer great opportunities for stable income at higher rates than the market value. Their volatility, however, calls for investment in “junk bond” ETF rather than individual bonds to mitigate against their associated risks.
Advantages of bonds for stable income generation include:
- High liquidity
The bond market is always afloat with buyers and sellers. Hence liquidation at any given time is not a challenge.
- Low volatility
Short- and medium-term bonds have very low volatility than stocks and other investment instruments; hence safer.
The disadvantages of relying on bonds for a stable income include:
- Rising interest rates
Despite being a haven investment, interest rates have a bearing on bond value. A rise in interest rates lowers the value while a rate decrease raises their value.
- Credit risk
This is a challenge for those holding corporate bonds. Cashflow problems of the bond issuer might result in defaulted interest and principal amount payments.
One of the surest ways of ensuring steady and consistent cash flow is high-dividend stock investing. With the proper screening, the stock market reveals numerous companies paying yields above the prevailing inflation rates. The trick is to consider the high dividend pay-outs when picking the stocks and keep in mind the stock value, dividend cycle and pay-out reliability, and the organization’s stability.
To find this balance considers companies that have:
- The market capitalization of over $10 million
- Dividend pay-out of over 3%
- Low volatility: a beta rating of one or less means their volatility is below the average market
Advantages of stocks’ investing for stable income generation include:
- An excellent inflation hedging strategy
Regular dividend payments help caution against inflation rates.
- Total robust investment returns
Well-picked stocks provide both passive income and their value over time to grow wealth for the holder.
- Compounded returns through dividend reinvestment
Use of income dividends received to reinvest in more equity shares for higher dividends in the future.
The disadvantages of stock investing for stable income include:
- Dividend policy change risk
Organizations may change the dividend policy to suit their operational framework, disrupting the regular cash flow cycles.
- Tax inefficiencies
Capital gains and dividends are taxable at higher rates than other investment instrument returns. For example, dividends are a share of an organization’s profits. Organizations pay corporation tax on profits made, and once profit-sharing in the form of dividends happens, they are once again taxed-double taxation.
- Investment risk
Stocks are relatively more volatile compared to other investment instruments. It is, therefore, more probable to lose the money invested in stocks than in any other investment instrument. Investment risk is the reason why experts advise portfolio diversification-only 30-40% at most on stocks.
For a diversified portfolio to be complete, there ought to be real estate investment present. The trick to real estate investment is picking prime property whose net value is a cash inflow.
For example, invest in a property that gives you a rental income of $1500, with the total maintenance cost for the property amounting to $900. The net rental income cash flow in this scenario is $600.
The advantages of real estate investment for a stable income include:
- Positive cashflow
Positive cashflow real estate property provides read and liquid cash from the onset for use in day-to-day expenditure payment.
- Capital gains
An ideal real estate investment should result in 6-7% in monthly yield and capital gains-the rent and value should appreciate over time.
The disadvantages of real estate investment for a stable income include:
- Higher taxes
The increased income from rental properties is subject to taxation, moving the investor to a higher tax bracket.
- Lower capital gains and depreciation
The value of building over time depreciates due to wear and tear and changes in market dynamics. Getting property to invest in around prime areas like the city is a hard nut to crack hence rapid capital growth is a challenge.
- Highly capital intensive
Except for REITs, real estate investing is highly capital intensive.
Exchange-traded funds refer to a basket of investment instruments tracking a particular index. ETFs comprise either equity stocks, bonds, real estate investment trust funds (REITs), commodities, or currencies.
ETF investing for positive cash flow behooves investor consideration:
- Regular return payments
- Low expense ratio
- Diversified holding base
In addition, a diversified holding base ensures no single firm has the majority fund weighting hence influencing the fund’s performance individually.
The advantages of ETFs for a stable income include:
- Spread risk
ETFs are a basket of investment instruments whose individual performance has a marginal effect on the overall fund performance. Therefore, ETF investing spreads the investment risk over a wide asset variety rather than a single asset.
- Low cost
ETFs, provide investors with lower capital requirements for several assets than individually investing on the ETF assets. In addition, most ETFs nowadays also don’t attract commissions when investing in them, further lowering the cost of ETF investing.
The disadvantages of ETFs for a stable income include:
- Liquidity issues
ETFs are not as liquid as other investment assets.
- Control issues
ETFs come as a basket with no room to pick the underlying holdings.
The ultimate goal for every individual is financial freedom, work for a passion and make a difference rather than to make a living. Financial freedom is achievable through various investment instruments, albeit at risk. To mitigate against these risks, investors need to pick assets and strategies that align with their cash flow objectives and align with their risk tolerance. Cash flow investing always accounts for rising inflation rates and mitigates through high-yield investment instruments.