Cash-flow investing is increasingly attractive during times of increased market volatility
The outlook on the Omnicron variant of COVID-19 on global markets is changing by the minute, but I am reminded of a tried-and-true approach that can provide investors with some peace of mind during uncertain market conditions: focusing on the value quality that cash flow adds as opposed to movements in the asset price.
Cash-flow investing, in basic terms, means purchasing an asset that provides income at regular intervals versus one solely based on price appreciation. Whether it is monthly, quarterly, semi-annual, etc., you will receive regular cash distributions that can be reinvested or used to finance your lifestyle.
Considered a relatively conservative approach to investing, acquiring cash-flow-producing assets can be attractive for a number of reasons.
First, the asset will provide value on a regular basis regardless of its current market price. A temporary drop in value can be viewed as positive for cash-flow investors because they can now use the distribution amount to buy more of the asset at a distressed price, hence increasing their future cash-flow amount.
Secondly, dividends or proceeds from cash-flow investments can be used to fund lifestyle expenses in retirement without eating into your overall pot of capital.
This shift in focus from market price to value can help diversify investment portfolios and mitigate the impact of public market uncertainty. Ultimately, cash-flow investments provide flexibility to rebalance, protection against market volatility, and peace of mind that you’re earning sustainable income with less concern about the economic impact of current events.
For example, in February 2020, we switched our monthly cash-flow-producing assets from reinvest to pay out for many clients when public equity markets sharply reacted to COVID-19 uncertainty. This free cash flow allowed us to purchase dividend-paying equities at a large discount for the ensuing six months until they reached their pre-pandemic valuations.
Dividend-paying equities are just one of several types of cash-flow investments.
Real estate : Cash flow is the result of proceeds from rent collected. The value of the property will likely appreciate over the long term, but the cash flow produced monthly or annually is relatively consistent. The goal here is for the income from the property to cover all your costs on the property and provide a steady profit.
Investing in a real estate fund can be an excellent source of passive income and provide steady long-term returns. Real estate funds can have a similar return to individual property ownership without the added stress of personally maintaining the property.
Mortgage funds : Cash flow comes from regular loan interest repayments over the term of the loan. Loans are often secured by real property with a varying loan-to-value ratio.
Private assets : Assets such as private debt offer higher-yielding returns with significantly lower volatility than publicly traded securities. By their nature, private assets are not subject to the same whims of the crowd that the public markets are.
Dividend-paying stocks : Arguably the most volatile cash-flow-producing investment available to the average retail investor. The income from dividend-paying stocks can be less consistent than other cash-flow-generating assets. Also, your investment value can fluctuate depending on market events and the company’s performance. One strategy for mitigating some of the volatility is to invest in a fund focusing on long-term growth in a large number of dividend-paying stocks.
Bonds or bond funds : Bonds, essentially the debt of companies or governments, can provide relatively low returns, but are generally viewed as safe investments depending on their rating. Again, a way to protect your bond investment and still see regular cash flow is to invest in a bond fund that provides diversification across the bond market.
As a whole, cash-flow investing helps protect investors in volatile markets while also taking advantage of temporary market troughs. This is one strategy I would recommend to all investors regardless of portfolio size. If there’s one thing I’ve learned over the past number of years, there’s never a wrong time to start.
James McCarthy, CIM, is a senior wealth associate/client relationship manager at Nicola Wealth. This article should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. All investments contain risk and may gain or lose value. Nicola Wealth is registered as a portfolio manager, exempt market dealer and investment fund manager with the required provincial securities commissions.
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TORONTO – Strength in the base metal and technology sectors helped Canada’s main stock index gain almost 100 points on Friday, while U.S. stock markets climbed to their best week of the year.
“It’s been almost a complete opposite or retracement of what we saw last week,” said Philip Petursson, chief investment strategist at IG Wealth Management.
In New York, the Dow Jones industrial average was up 297.01 points at 41,393.78. The S&P 500 index was up 30.26 points at 5,626.02, while the Nasdaq composite was up 114.30 points at 17,683.98.
The S&P/TSX composite index closed up 93.51 points at 23,568.65.
While last week saw a “healthy” pullback on weaker economic data, this week investors appeared to be buying the dip and hoping the central bank “comes to the rescue,” said Petursson.
Next week, the U.S. Federal Reserve is widely expected to cut its key interest rate for the first time in several years after it significantly hiked it to fight inflation.
But the magnitude of that first cut has been the subject of debate, and the market appears split on whether the cut will be a quarter of a percentage point or a larger half-point reduction.
Petursson thinks it’s clear the smaller cut is coming. Economic data recently hasn’t been great, but it hasn’t been that bad either, he said — and inflation may have come down significantly, but it’s not defeated just yet.
“I think they’re going to be very steady,” he said, with one small cut at each of their three decisions scheduled for the rest of 2024, and more into 2025.
“I don’t think there’s a sense of urgency on the part of the Fed that they have to do something immediately.
A larger cut could also send the wrong message to the markets, added Petursson: that the Fed made a mistake in waiting this long to cut, or that it’s seeing concerning signs in the economy.
It would also be “counter to what they’ve signaled,” he said.
More important than the cut — other than the new tone it sets — will be what Fed chair Jerome Powell has to say, according to Petursson.
“That’s going to be more important than the size of the cut itself,” he said.
In Canada, where the central bank has already cut three times, Petursson expects two more before the year is through.
“Here, the labour situation is worse than what we see in the United States,” he said.
The Canadian dollar traded for 73.61 cents US compared with 73.58 cents US on Thursday.
The October crude oil contract was down 32 cents at US$68.65 per barrel and the October natural gas contract was down five cents at US$2.31 per mmBTU.
The December gold contract was up US$30.10 at US$2,610.70 an ounce and the December copper contract was up four cents US$4.24 a pound.
— With files from The Associated Press
This report by The Canadian Press was first published Sept. 13, 2024.
Companies in this story: (TSX:GSPTSE, TSX:CADUSD)
The Canadian Press. All rights reserved.
TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.
The S&P/TSX composite index was down 239.24 points at 22,749.04.
In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.
The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.
The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.
The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.
This report by The Canadian Press was first published Sept. 6, 2024.
Companies in this story: (TSX:GSPTSE, TSX:CADUSD)
The Canadian Press. All rights reserved.
TORONTO – Canada’s main stock index was up more than 150 points in late-morning trading, helped by strength in technology, financial and energy stocks, while U.S. stock markets also pushed higher.
The S&P/TSX composite index was up 171.41 points at 23,298.39.
In New York, the Dow Jones industrial average was up 278.37 points at 41,369.79. The S&P 500 index was up 38.17 points at 5,630.35, while the Nasdaq composite was up 177.15 points at 17,733.18.
The Canadian dollar traded for 74.19 cents US compared with 74.23 cents US on Wednesday.
The October crude oil contract was up US$1.75 at US$76.27 per barrel and the October natural gas contract was up less than a penny at US$2.10 per mmBTU.
The December gold contract was up US$18.70 at US$2,556.50 an ounce and the December copper contract was down less than a penny at US$4.22 a pound.
This report by The Canadian Press was first published Aug. 29, 2024.
Companies in this story: (TSX:GSPTSE, TSX:CADUSD)
The Canadian Press. All rights reserved.
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