Investing cash isn’t just a strategy for your grandparents

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Cash flow investing is increasingly attractive in times of heightened market volatility

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The outlook for the Omnicron variant of COVID-19 in global markets is changing by the minute, but I remember one proven approach that can provide investors with some peace of mind in uncertain market conditions: focus on the quality of the value this cash flow adds to as opposed to the movements in the price of the asset.

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Cash flow investing, in simple terms, means buying an asset that provides income at regular intervals versus an asset solely based on price appreciation. Whether monthly, quarterly, semi-annually, etc., you will receive regular cash distributions that can be reinvested or used to finance your lifestyle.

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Considered a relatively conservative investment approach, acquiring cash flow-generating 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 a positive for cash flow investors, as they can now use the distribution amount to buy more of the asset at a depreciated price, thereby increasing the amount of their future cash flow.

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Second, dividends or proceeds from cash investments can be used to fund retirement lifestyle expenses without cutting into your overall capital.

This shift in focus from market price to value can help diversify investment portfolios and lessen the impact of uncertainty in public markets. Ultimately, cash investments provide rebalancing flexibility, protection against market volatility, and peace of mind that you’re earning sustainable income with less worry about the economic impact of current events.

For example, in February 2020, we shifted our monthly cash flow-generating assets from reinvestment to payment for many clients when public equity markets reacted strongly to the uncertainty related to COVID-19. This free cash flow allowed us to buy dividend-paying stocks at a steep discount for the next six months until they reached their pre-pandemic valuations.

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Dividend-paying stocks are just one of many types of cash investments.

Real estate : Cash is the result of income from rents received. The value of the property will likely appreciate over the long term, but the cash flow generated monthly or annually is relatively constant. The goal here is for the income from the property to cover all of your costs on the property and provide a steady profit.

Investing in a real estate fund can be a great source of passive income and provide stable long-term returns. Real estate funds can have a return similar to individual ownership without the added stress of personally maintaining the property.

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Mortgage funds : Cash flow comes from regular interest payments over the life of the loan. Loans are often secured by real estate with a variable loan-to-value ratio.

Private assets : Assets such as private debt offer higher returns with significantly lower volatility than publicly traded securities. By their nature, private assets are not subject to the same whims of the crowd as public markets.

Dividend-paying stocks : Arguably the most volatile cash flow generating investment available to the average retail investor. Income from dividend-paying stocks may be less constant than other cash-generating assets. In addition, the value of your investment may fluctuate based on market events and company performance. One strategy to mitigate some of the volatility is to invest in a fund that focuses on the long-term growth of a large number of dividend-paying stocks.

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Bonds or bond funds : Bonds, primarily corporate or government debt, can offer relatively low yields, but are generally considered safe investments based on their rating. Again, one way to protect your bond investment while benefiting from steady cash flow is to invest in a bond fund that offers diversification in the bond market.

Overall, cash flow investing helps protect investors in volatile markets while taking advantage of temporary market lows. This is a strategy I would recommend to all investors, regardless of the size of their portfolio. If there’s one thing I’ve learned over the past few years, it’s that there’s never a bad time to start.

James McCarthy, CIM, is a senior partner/client relationship manager at Nicola Wealth. This article should not be considered investment advice or a recommendation of any particular security, strategy or investment product. All investments involve risk and can 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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