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Sunday, April 30, 2017

I’ll Take the Cash, Please

Posted by Dave on January 24, 2012

This is a guest post by Dave, who is also looking to retire no later than 45, but unlike Tim has no kids and doesn’t want any. Dave is from Ontario and is working towards his CGA certification.

I am by far the last person to ask about specific investing advice (for now, I hope to change this in the near future).  What I can tell you is what I am looking at right now in my future investment plan and why I am going to do it this way.

I have an undergraduate degree in Economics (which doesn’t really mean a whole lot, I do not claim in any way to be an Economist, but I sometimes remember some of the stuff I tried to learn in the four years of school I was paying for) – one of the main facets of Economics is an efficient market, whether it is in a labour market, commodity marketplace or in the case of investing stocks and bonds.  The efficient market hypothesis (as it applies to stocks) basically states that prices reflect all known information available.  A lot of investing books use this hypothesis to tout index funds, essentially saying “the market is efficient anyways, don’t try to beat it, just own it (through index investments)”.  I generally agree with this, and think that index investing is right for most people – it’s safe (or relatively safe, as compared to either keeping cash under a mattress or picking stocks based on a hunch) and pretty easy to do, I just don’t want to do this.

I’m not eschewing index investing due to its simplicity – I’m pretty lazy and would enjoy something like a Couch Potato Portfolio, where I rebalance a few times per year and generally don’t worry about my investment otherwise, compared to a dividend portfolio of single stocks, which require constant monitoring.  No, I’m going to invest in things that are going to pay me cash now, not later.

Why is having cash now important to me?  There are a couple of reasons:

  1. I’ll need cash when I retire – a constant cash flow that comes from investments such as stocks, bonds and REITS will replace my salary at some point (hopefully).  Having to sell off the stock itself does not seem like a good long-term plan to last through retirement.  Dividends (or interest) paid out will allow me to own the original investment (which will hopefully appreciate).
  2. I don’t really trust the marketplace – This may seem like a silly reason to choose an investment, but for me I would rather have cash in my pocket now and see money coming in rather than investing in a company hoping to pull my money out at some future time.  I realize that I am a little crazy for this, but rather than seeing the stock appreciate, I would rather take a portion of my investment off the table.

My first reason is perhaps a little more rational than the second, but they both work for my purposes.  To me, investing has a lot to do with personal preference and these are mine.

Do you invest for capital gains, or cash flow, or a mix?  How do you decide (or did you decide) on the type of investments you were looking for?

Comments

5 Responses to “I’ll Take the Cash, Please”
  1. deegee says:

    Before I ERed 3 years ago, I was more interested in growth than in dividends. But now, I am more interested in (monthly) dividends than in growth.

    However, that being said, I do have both growth and dividends in both my non-retirement accounts (the ones used to pay my bills) and my IRA (the ones I won’t be accessing for another 12-15 years).

    In my non-retirement accounts, I have about 2/3 of my money in bond mutual funds which pay monthly divdends. The rest of it is in a stock mutual fund which has both a growth and dividend element, the latter paying quarterly dividends I am presently reinvested. Because I am in the 0% federal tax bracket for dividend income, I pay only state income taxes on them. At some point, I may need to take those dividends in cash (Plan B or C) so that will be an easy switch without having to revamp my portfolio.

    In my IRA, I have a slight majority in a stock index fund to keep the expenses low. It is growth oriented but it does pay some dividends and cap gains, none of which is taxable today. I also have money in a bond fund (for AA balnce) which pays monthly dividends.

    So I have a mix in both accounts but for different reasons.

    BTW, Dave, I have an undergraduate Economics degree, too. I learned a lot about how the world works while getting that degree.

  2. tylerjames says:

    I am a big fan of dividends, I really like to see every month of every quarter that I now I have more money in my pocket. But seeing as I have at least 10-15 years before I will be retiring I do have hopes that my investments will grow in value. When I have more money to invest I will be buying more dividend payers as well as perhaps an index fund for capital growth.

    So I keep both, but the closer I get to retirement the more likely I will be to buy dividend paying equities.

  3. John The Contractor says:

    I might be a little bit old school, but I like assets that I can reach out and touch and that aren’t “paper based”. For that reason I like physical real estate that I can rent for a positive cash flow, I like precious metals that I can use either for inflation or deflation, and I like owning a small part time business that I can control the cashflow of. The CAP rate on the real estate is 8% to 10%, gold was purchased at 275 an ounce, and for the small business when I want to I can either take on more or less work as cashflow demands.

  4. I may be a little biased, but I favor dividends over capital gains. With dividends, they are automatically deposited into your account where as capital gains you have to keep an eye on the market frequently to sell at an opportune time and that’s not something I want to do when I’m retired.

  5. I invest because of capital gains and dividends. And the best option for this (IMO) are blue chip stocks. I am 25 and I invest in the stock market for 1 year already. So far so good. When a crash happens (like 2008), I’ll simply add shares. Anyway, I favor long term investing – 5, 10, 20 years.

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