When it comes to successful long-term investing, it’s a good idea to focus on total return: the combination of price appreciation and dividend payouts. However, there are times when you might consider optimizing for cash flow instead. If you have upcoming obligations that can’t be covered by your work income alone — such as an unexpected medical emergency or a larger-than-expected tax bill — you may want to look into investments that can help make up for a cash shortfall.
Below, we’ll briefly review four strategies for accessing a little more money.
Focus on dividend payers
Many stocks in the investment universe are known for their ability to generate cash and in many cases even grow their dividends. Here I mean companies like AT&T, AbbVieand Morgan children — among other value stocks. But other, typically growth stocks in the tech space, don’t pay dividends and rely solely on appreciation to provide returns.
While dividend-paying stocks can offer cash flow of 4% to 6% per year, you’ll also need to focus on quality companies if you choose to go this route. A stock that pays a 5% dividend but experiences wild price swings can leave you with an overall negative net return. So you’ll need to be very clear about why you’re optimizing cash flow and have a strong case behind every single stock you buy.
Use a taxable account
One of the advantages of taxable brokerage accounts is that, unlike 401(k)s or IRAs, you can easily access the money whenever you want and at any age. If you’re looking to raise money by selling existing investments, doing so in a taxable account will likely result in a greater net benefit — especially if you’ve held the investments for more than a year (capital gains will be long-term, which are taxed at lower rates ). If you withdraw money from a 401(k) or IRA before taxes, you’ll pay ordinary income tax plus early withdrawal penalty if you are under age 59 1/2.
That doesn’t mean you shouldn’t use a 401(k) or IRA; in fact, it’s quite the opposite. Both 401(k)s and IRAs can be particularly powerful tools from a tax-deferral and compounding growth perspective. However, make sure you have a taxable brokerage account for more easily accessible investments while doing everything you can to maximize your 401(k) and your IRA each year.
Set cash dividends
If you own stocks that pay dividends, make sure you turn on the account setting that allows dividends to show up as cash in your account. If you don’t do this, you’ll just be reinvesting the dividends back into the company (or companies) that paid them, increasing your equity holdings, but not actually providing you with cash. While this doesn’t increase the amount of dividend you end up receiving, it does make cash available to you on a recurring schedule.
Pause for a moment
Before investing too much money in the stock market, make sure you have enough money to cover upcoming obligations. As we’ve seen this year, markets can and do fall quickly – for whatever reason. If you’re worried about triggering your entire nest egg, take a moment to stop and think about how much you’re willing to lose in the short term if the markets really do turn south. You just stick to your money and no investing can be a viable way to maintain easy access to money.
Cash really is still king
After all, you need cash to pay for expenses. Investing your money in 401(k)s and IRAs is a great retirement savings strategy, even though that money won’t do much for a rent or mortgage payment due next month (unless you’re already retired). To squeeze a little more money out of your investments, focus on dividend-paying stocks, set dividends in cash, and hold off on investing all your money until you have a significant cash cushion.
Some small changes to your portfolio can greatly reduce anxiety around daily market movements. Pay attention to your regular obligations and make sure the cash flow from all sources meets all of them.