Maintaining Cashflow During Difficult Times
The current situation is truly not the best right now. As the war is continuing and the pandemic is still not over the financial markets are looking at hard times ahead. Not only the recent sanctions on Russia could have a major impact on the future of the global economy but the FED’s decision to raise interest rates as well. This brings us to the question: How to invest in such times? One of the most important things for an investor is keeping the cash flow up. This is why in today’s article I want to talk about possibilities to keep the cash flow up by utilizing dividend investing.
Dividend Investing
One of the most sustainable methods over the past decades other than real estate was dividend investing. This should be no new way for people who are familiar in the investing sector but for people who are not completely aware I will try to explain it in a few sentences. There are companies out there who will pay parts of their profits out to their investors. This means that if you hold shares of a company that is promising to pay dividends you can expect to get some cash flow. The payments are varying from company to company. There are options of monthly, quarterly, half-yearly and yearly. Most of the time the dividend payments are around 1-8% depending on the company and the amount of revenue they made in the year.
There are several different types of dividends paying companies. For starters, there are the classic corporates like Coca Cola who can be considered a value stock. They pay a quarterly dividend and most of the time it is something between 2 and 3%. Next up we have Business Development Companies. These companies are giving out loans to smaller businesses in the hope of developing them. In my opinion these companies are working more or less like a bank with an incentive for the economy. Such an example is Goldman Sachs BDC. They also pay quarterly with a staggering rate of around 9%. Another option would be Real Estate Investment Trusts. These companies are renting out different real estate and their cash flow is the rent. With this money they are able to pay the share holders monthly. A good example is Reality Income which gives its shareholders around 5% in dividends. Last but not least we have the option to invest in a ETF which covers dividend paying companies. This is a good opportunity to get a taste of dividend investing, although I must admit that the ETFs are paying most of the time less percentages than individual companies. On the other hand, you are not at risk that one company can default.
Advantages & Drawbacks
With some examples it is also important to talk about the advantages and drawbacks of such dividend portfolios. First up we have the constant cashflow. While this cash flow is not certainly guaranteed the companies know that the investors are investing in this company because they expect dividend payments. This incentivizes the companies to continue paying dividends. Looking on this point from the company’s perspective, we can see that this is not always the best choice as this money could have been used to develop or expand its own business. Jumping back, this means that the company will pay dividends even in hard times like it is right now. Furthermore, these companies sell products that are needed every day, which makes their stock price stable even during hard times like we are about to enter. They are not as volatile as tech stocks.
This is also not the best property of a stock as companies like Amazon seem to constantly grow and offer their hare holders return of over 15%. These companies will fail during hard times which makes the value stocks very attractive again. This is why tech stocks are doing great during bull markets while dividend and value stocks are a great investments during bear markets.
Conclusion
As always, I think a good mix of both is a good way to start of a portfolio. In my opinion it is important to get some experience in both sectors of the market and explore for yourself what suits you most. Of course crypto currency is another vehicle that have similar attributes compared to dividends (staking rewards). This can be covered in a whole separate article. In this article I wanted to show case the option on how to maintain cash flow during upcoming difficult times.