How to Compose Real Estate, Stocks, ETFs, and Bonds In Positive Cash Flow Portfolio

Aug 6, 2020 03:39 AM ET
How to Compose Real Estate, Stocks, ETFs, and Bonds In Positive Cash Flow Portfolio

Reasons why a positive cash flow portfolio is what you need

The need for maintaining positive cash flow is being felt even more in the current times, mostly due to rampant job losses.  Also, if you are retired or approaching retirement, then creating positive cash flow is essential for you in order to provide a guaranteed income stream.  Positive cash flow helps you pay those monthly bills, EMIs, and daily expenses.  A passive income generation portfolio by investing and reinvesting will help you cover and provision for all such expenditures.

What instruments can help you generate a stable income?

There are several instruments available at your disposal that will help you generate passive stable income are bonds, dividend stocks, real estate, and ETF.  As an investor, you should mix things up and get exposure to different asset classes so that you are able to earn high income with reduced risks and also stay ahead of inflation.  Investing first with smaller amounts and then reinvesting the gains coupled with added capital is the mantra.

Here a the all time best assets for building positive cashflow portfolio:

Real Estate

With the present real estate market taking a hit due to the ongoing pandemic, experts feel that it is the right time to invest in property as mortgage rates are down.  Earning rich rent from properties you own creates passive income.  You can judiciously pick up the property and use these rental incomes to plan your retirement.  Investing through REITs (Real Estate Investment Trusts) are also good options to invest in real estate.  Here individuals pool in the capital and the firm invests on their behalf and distributes the rental income earned thereafter amongst its investors. 

Pros:

Appreciation over time – A property more often than not will appreciate over time and generally outpaces inflation.  Stocks can go down, but the property will always have tangible value. 

Unique tax benefits with steady cash flow – The government offers tax benefits to real estate investors.  Rental income is exempt from self-employment tax.  The rental property provides tax deductions that you can use against your other income.  Monthly rent provides a passive income that can be reinvested elsewhere.

Cons:

High investment: Real estate attracts high investments as down payment, closing cost, and maintenance cost.  You also have to pay property tax, insurance, and mortgage payments.

A time-consuming & long-term investment: Learning and managing your rental properties actively can be time-consuming.  Tenants also sometimes cause problems with nonpayment of rent thus affecting your cash flow. There might sometimes be a need to take to courts sometimes for nonpayment or other issues, which consumes time and money. Selling property quickly is never easy and involves high transaction costs.

Goal: Investing in real estate through REITs is relatively less stressful if you are looking to earn through rentals.  Holding to trusted non-problematic tenants is a smart way to go.

Dividend Stocks

Dividend-yielding stocks are also a good way to generate passive income.  Companies will declare dividends from time to time in the ratio of your stock holdings. By declaring dividends, the companies incentivize the investor for staying invested with them.  Also, tax write-offs are allowed to companies against dividend payouts. Dividend stocks are also called ‘hybrid investments’ due to their potential of paying dividends as well as price appreciation.

Pros:

Real Money – Dividend stocks directly send real money into shareholder’s hands in real-time.  This can be reinvested to earn more dividends next time.

Regular-interval-tax-efficient money:– Come hail come shine, dividend stocks announce payouts every quarter.  High-dividend stocks generate passive income to the tune of 3.5% to 5.2% which is higher than bank CD which pays less than 1%.  Dividends are taxed at a lower rate than bonds or other ordinary income.

Cons:

Not government-insured – Unlike bank savings accounts that have a fixed rate of interest, companies are not governed by any law to pay dividends to its shareholders. Dividends follow profit performances.  Thus, dividends will go down if profits go down.

Riskier in a bear market – Dividend stocks pose a higher risk in a prolonged bear market.  Thus, when compared to high-quality short-term bonds, dividend stocks typically yield less or zero payouts when caught in a downward spiral.

Goal: Investing in very strong and robust high-dividend stocks should be done after in-depth analysis.  Check for dividend yields and dividend payout ratios from the past. A company’s dividend policy should also be analyzed thoroughly.

Exchange traded funds

ETF is an open-ended investment fund just like traditional managed funds. ETFs offer access to almost every major asset class.  They closely monitor the performance of a given index and deliver returns of that asset class or index.  ETFs can be traded throughout the day just like stocks.  ETFs provide a basket of securities that trade on an exchange.  ETFs can be used as core holdings and building blocks for your portfolio construction.

Pros:

Cost-effective with wide diversified exposure – ETFs help investors gain a wide range of exposure to investment strategies, asset classes like commodities and stocks or bonds, and also to geographic regions, and can be bought just like buying a share. There are fewer brokerage commissions; so it is cost-effective.

Liquidity and transparency – It is easy to trade as it can be bought and sold throughout the trading day.  Information including portfolio holdings and fees of ETFs can be accessed through fund manager portals.

Cons:

The underperformance of asset class – ETFs do come with an investment risk associated with the asset class and strategy provided by a particular ETF.  Any positive or negative movement in the index is directly proportional to the investment performance of the ETF.

Goal: Choosing an ETF that tracks a good index focus is always helpful.  Indexes that cover about 95% to 98% of the market are considered good.  Broad market indices are best for diversification.

Bonds: 

Loans made to large organizations like national governments, cities, and corporations are done through bonds.  These entities are large-sized and thus require borrowing money from various different sources.  Bonds are fixed-income investments that promise a specific interest rate and a specific payback date. They come in many different types depending upon issuing authority, maturity time period, rate of interest, and risk.  The short-term U.S. Treasury bills are the safest but with the least interest.  However, the long-term benchmark 10-year-note also offers relatively less risk with slightly higher yields. 

Pros:

Income – You get income via interest payments. Additionally, on maturity, you also get your principal back. This makes bonds safe investments.

Profit on resale – Sometimes bond traders bid beyond the face value of a bond.  This happens when its net present value of interest plus principal is higher than alternative bond investments.  Thus reselling your bond in such a scenario is profitable.

Cons:

Lower yield – Over the long term, bonds yield a lower return on investment than the stock market thus not being able to beat inflation. 

Risk of default – borrowing institutions can default resulting in loss of investment. 

Goal: Checking S&P and Moody’s ratings before investing is very important to avoid credit risk, inflation risk, reinvestment risk, and liquidity risk.  

Summary:

The various options discussed above are great sources for generating passive income. Be forewarned that all investments are subject to market risks so please make sure to weigh the pros and cons before investing.


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