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.

The stock market is probably the most well-known and used investment asset in the US. There are millions of Americans who use it for investment and retirement accounts. It has probably been the best investment asset for people to generate wealth over the past century. The stock market includes stocks, bonds, exchange-traded products, and derivatives. Investors all around the world use them as a source of investment income.

We are going to look at three different ways to generate cash flow. The first is probably the most well-known and that is with bonds. The second is using dividend-paying stocks. The third is using derivatives such as covered calls and cash-secured puts. Then we will go over our recommended strategy for investors to use to get cash flow from the stock market.

Bonds

Bonds are a valuable financial instrument when it comes to managing cash flow assets. These fixed-income securities provide a stable and predictable stream of income, making them an attractive choice for investors seeking regular cash flow. By investing in bonds, you can enjoy the benefits of interest payments at regular intervals, typically semi-annually, which can help cover ongoing expenses or provide a reliable source of income. Additionally, bonds come with various maturities, allowing you to tailor your investment strategy to match your specific cash flow needs. Whether it's government bonds, corporate bonds, or municipal bonds, they offer diversification options for cash flow assets, reducing risk and enhancing the stability of your financial portfolio.

Dividend Paying Stocks

Dividend-paying stocks serve as a compelling option for investors seeking cash flow assets. These stocks represent ownership in companies that share a portion of their profits with shareholders in the form of dividends. By holding dividend-paying stocks, you can enjoy a regular stream of income in the form of dividend payments, which can be especially beneficial for those looking to supplement their income, fund retirement, or meet ongoing financial needs. These investments offer flexibility as you can choose stocks with various dividend yields and growth potential, allowing you to customize your portfolio according to your cash flow requirements and risk tolerance. While dividend stocks come with some market volatility, their potential for capital appreciation and consistent income make them an attractive choice for building and maintaining cash flow assets.

Covered Calls/Cash-Secured Puts

Utilizing covered calls and cash-secured puts can be a savvy approach for generating cash flow assets in an investment portfolio. Covered calls involve the sale of call options on stocks you already own, providing you with upfront premium income. This strategy allows investors to capture income in a relatively low-risk manner, as they retain ownership of the underlying assets and benefit from potential stock appreciation. On the other hand, cash-secured puts involve selling put options while setting aside the cash to purchase the underlying stock if the options are exercised. This strategy can be an effective way to acquire stocks at a lower cost while generating income through option premiums. Both covered calls and cash-secured puts offer the potential for consistent cash flow, although they do come with certain risks and require careful management. These strategies can be particularly attractive for those looking to complement their income or enhance their investment returns in a diversified and strategic manner.

Recommended Strategy

Combining dividend-paying stocks with covered calls is a powerful strategy for generating cash flow in an investment portfolio. By holding dividend stocks and simultaneously selling covered calls on those holdings, investors can benefit from double income streams. The dividends offer a consistent and predictable source of income, while the premiums received from covered call options enhance that income.

For example, let's consider a scenario with Coca-Cola (KO). Suppose you own 100 shares of KO, which paid a $1.76 dividend per share in 2022. By itself, your annual income from dividends would be $176 (100 shares x $1.76). Now, let's say you also sell covered calls on your KO shares every month and generate $10 for each contract that you sell. If you sell covered calls on your 100 shares, you can generate an extra $120 in premiums for the entire year. So, your total annual income would be $296 ($176 from dividends + $120 from covered call premiums). This strategy can significantly boost your cash flow compared to relying solely on dividends while potentially allowing you to benefit from stock appreciation if the options remain unexercised.

Now imagine you bought 100 shares of KO every year for 10 years as the market rose and fell. You could also make more due as companies may increase their dividend payouts. If we look at how the dividend rose from 2012 to 2022 (rise from $1.02 to $1.76 or 56% increase) then extrapolate that to 2032 (56% increase on $1.76 is $2.75). At the end of 10 years, you would have 1000 shares of KO and potentially generate over $3950 every year ($2750 from dividends and $1200 from covered calls).

Conclusion

This can be an amazing source of cash flow for investors as you increase the time horizon and include multiple stocks or ETFs. This is why the stock market has made many investors wealthy. We hope you learned something new today. Join us next week as we look at how to use cryptocurrencies 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.