September 30, 2022

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 payments. However, there are times when you might think about optimizing for cash flow instead. If you have upcoming obligations that can’t be covered by your job income alone — like an unexpected medical emergency or a larger-than-expected tax bill — you might want to look into investments that can help make up a cash shortage.
Below, we’ll briefly review four strategies to access a little more cash.
Many stocks across the investment universe are known for their ability to generate cash, and in many cases even to increase their dividend. Here, I refer to companies like AT&T, AbbVie, and Kinder Morgan — among other value stocks. But others, typically growth stocks in the tech space, pay no dividend and rely on price appreciation alone to provide returns.
While dividend-paying stocks can offer cash flow to the tune 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 swings in price could leave you with a negative net return overall. So you’ll need to be especially clear on why you’re optimizing for cash flow and have a strong thesis behind any individual stock you buy.
Image source: Getty Images.
One of the upsides of taxable brokerage accounts is that, unlike 401(k)s or IRAs, you can easily access the money when you want it and at any age. If you’re looking to raise cash by selling existing investments, doing so in a taxable account is likely to result in a greater net benefit — especially if you’ve held the investments longer than a year (capital gains will be long term, which are taxed at lower rates). If you withdraw money from a 401(k) or pre-tax IRA, you’ll pay ordinary income tax plus an early withdrawal penalty if you’re under age 59 1/2.
This is not to say that you shouldn’t use a 401(k) or IRA; in fact, quite the opposite is true. Both 401(k)s and IRAs can be particularly powerful tools from the perspective of tax deferral and compound growth. That said, make sure to have a taxable brokerage account for more readily accessible investments, while simultaneously doing your best to max out both your 401(k) and your IRA every year.
If you own stocks that pay dividends, be sure to have the account setting turned on that allows for dividends to appear as cash in your account. If you don’t do this, you’ll simply reinvest dividends back into the company (or companies) that paid them, increasing your share holdings but not actually making cash available to you. While this doesn’t increase the amount of the dividend you ultimately receive, it does make cash available to you on a repeated schedule.
Before investing too much money in the stock market, be sure you have enough cash on hand to cover upcoming obligations. As we’ve seen this year, markets can and do fall quickly — for any reason at all. If you’re anxious about putting your entire nest egg to work, take a moment to pause and consider how much you’re willing to lose in the short run if markets do turn further south. Simply hanging on to your money and not investing can be a viable way to maintain ready access to cash.
In the end, you need cash to pay for expenses. Investing your money in 401(k)s and IRAs is a great strategy for retirement savings, though that money won’t help much with a rent or mortgage payment due next month (unless you’re already retired). To squeeze a little more cash out of your investments, focus on dividend-paying stocks, set dividends to cash, and hold off on investing all your money before you have a sizable cash cushion.
Some small tweaks to your portfolio can go a long way in reducing anxiety around day-to-day market movements. Pay attention to your regular obligations and ensure that cash flow from all sources lines up to meet them all.
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