Welcome McFinancers. With the end of the year fast approaching, we wanted to take the time to go over different ways for investors to get cash flow from their investments. As investors, we know that there are two investing strategies: capital gains and cash flow. A reminder that capital gains are made when an investor buys something for a low price and sells it after it has appreciated in price. This offers investors the chance to increase their money exponentially over a short period. On the other hand, investors can invest for cash flow. This is when investors buy assets that provide a consistent income over time. Each investing strategy has its pros and cons and each investor has their preference on their investing strategy. Here at McFinance, we recommend that investors focus on cash-flowing assets over capital gains due to their reliability in any market, and it’s more passive than capital gains investments. Over the next four weeks, we are going to look at different ways for cash flow in the stock market, crypto, commodities, and real estate.

Week 3: Commodities

Today we want to take a look at different ways we can generate cash flow with commodities. Commodities offer investors a unique opportunity since they are the basic goods. There will almost always be a demand for commodities as people need to eat and businesses need them to create products. Commodities also provide protection during recession as they remain necessary for everyday people. People will always need food to eat and oil/gas to heat their homes. They also provide cash flow as you continue to receive profits as long as the asset is giving you more commodities (i.e. an oil well still has oil). While they do offer some benefits for investors, it is important to remember that commodities can provide challenges to investors. Investing in commodities can require large capital investments as it would require time and money to buy the necessary equipment to get the commodity. It would also be difficult to find some commodities as they can be located throughout the world. This could lead to issues with jurisdiction with other countries. While these may be challenges that can deter investors, they also allow you opportunities as there is less competition compared to the stock market or real estate. Regardless of the asset class, all investors should do their own research and due diligence to determine if an investment is right for their portfolio. Listed below are 3 ways that investors can use commodities for cash flow.

Oil Wells

Owning oil wells can be a lucrative strategy to generate cash flow, particularly in regions with significant oil reserves. Oil production yields a steady stream of income through the sale of crude oil and natural gas, making it an attractive investment for individuals and companies alike. By owning and operating oil wells, investors can benefit from the consistent demand for energy resources, and they have the potential to generate substantial revenue, especially during periods of high oil prices. However, it's important to note that owning and managing oil wells involves considerable capital investment, ongoing maintenance costs, and regulatory considerations, which can be complex and sometimes unpredictable. It's a strategy that requires a strong understanding of the energy industry and diligent oversight, but for those who can navigate the challenges, owning oil wells can be a rewarding means of creating cash flow assets.

Mines

Owning mines, whether for precious metals, minerals, or other valuable resources, can be a potentially lucrative avenue for generating cash flow. Mines offer the opportunity to extract and sell valuable materials, providing a steady source of income. The cash flow generated from mining operations can be significant, particularly when global demand for these resources is high, and market prices are favorable. However, it's important to recognize that mining can also be capital-intensive, with substantial upfront costs for exploration, development, and equipment. Additionally, mining operations may face environmental and regulatory challenges that require careful management. Overall, owning and operating mines can be a rewarding strategy for those with a strong understanding of the mining industry and a willingness to invest in both the resources and the necessary infrastructure, all while adhering to responsible and sustainable practices.

Stocks

They say that the stock market is one of the greatest tools to become wealthy. It provides investors with opportunities in almost every asset class that investors can think of. So it shouldn’t be a surprise that there are stocks that provide cash flow from commodities. The stock market also has futures contracts which involve buying and selling the price of commodities at certain dates and at certain times. Futures contracts let companies buy certain goods for a certain price in the future. They allow companies to plan their future expenses. Futures contracts also allow investors to invest in the price of commodities as they rise and fall. These futures contracts would fall under capital gains investments and not cash-flowing investments so we aren’t going to discuss them today. Today we are looking at company stocks that operate mines or oil wells. It would be like you have joined a group of thousands of investors to buy a small portion of an oil well.

Stocks that provide royalty payments, also known as royalty stocks, offer investors the opportunity to earn income based on the usage or sales of certain intellectual property or natural resources. One real-life example of a stock that pays royalties is Franco-Nevada Corporation (NYSE: FNV). Franco-Nevada is a leading gold-focused royalty and streaming company. By investing in Franco-Nevada stock, shareholders essentially receive a portion of the revenue generated from gold and other mineral resources. As these commodities are extracted and sold by mining companies, Franco-Nevada earns royalties or streams, and a portion of these earnings is distributed to its shareholders. This allows investors to benefit from the potential growth in the mining industry and the rise in precious metal prices while earning regular royalty-based income from their stock holdings.

Conclusion

We hope you learned something new today. Commodities provide massive potential for investors as there is always a demand for their goods. They do offer unique challenges compared to other asset classes, such as environmental regulations, jurisdictions, and capital investment. While they do offer these challenges, we believe that the pros outweigh the cons. We think it is important to include a small portion of your investment portfolio into commodities whether that is through owning an oil well or owning royalty stocks. It is important that every investor determines their own portfolio. Join us next week as we look at how to use real estate to generate cash flow.

* The examples used in the above scenario are for educational purposes and are not financial advice. Investors should do their own due diligence on investments. Also, remember that you should never invest money that you are not willing to lose.