If you rely on your investments for income, an important aspect of managing your portfolio is cash flow (dividend income). Correctly structured cash flow is critical, so let’s have a look at what you might need to consider.
What is cash flow?
Cash flow simply looks at the payment frequency of income from an investment. This dividend income is paid regularly (ie. monthly, biannually, annually), but can sometimes be erratic, particularly for longer term investments, such as private equity.
It differs from the total income return in that it examines how often and when income is paid rather than the actual level of income received from the investment over a set period.
Why is cash flow important?
It’s important to understand the cash flow components from your portfolio for two main reasons:
1 – It’s a fundamental step in having an effective personal financial budget.
While you may be receiving income from an investment, if the income doesn’t arrive regularly enough to meet living expenses, you will need to access cash from other sources to bridge the gap. This might involve getting a cash advance from a credit card at high interest rates (never a good option), reducing (or possibly eliminating) your monthly savings or worse, by eating into your investment’s capital.
2 – Uneven cash flow makes accelerated debt reduction difficult to achieve.
Due to the high initial costs involved, many of us go into debt to purchase items such as cars. However, this debt comes at a price: while you are carrying it – you cannot use these funds to invest elsewhere. It makes financial sense to reduce lifestyle debt as quickly as possible so that these funds can be used to invest in financial assets that will appreciate in value, creating enduring wealth.
Consider cash flow diversification
Diversification doesn’t stop at your choice of investment assets. You need to consider it from a cash flow perspective too. It is essential to have a sufficient mix of underlying assets within your portfolio so that a relatively even income is received throughout the year.
While some investments may look similar at first glance, a prime differentiator between them may be the frequency of dividend, distribution or yield payments, franking credits and the terms on which they are paid.
Understanding cash flow is a crucial step in being able to maintain a budget, following a workable budget is the key to efficiently managing your wealth and achieving your financial goals.
Ask us for further guidance on how to manage your investment’s cash flow.
Intrinsic Private Wealth specialise in providing financial advice to Australian investors. With over 20 years of experience in the finance & investment industry.
General Advice Disclaimer: Information is of a general nature only and has been provided without taking account of your objectives, financial situation or needs. Because of this, you should consider whether the information is appropriate in light of your particular objectives, financial situation and needs. Intrinsic Private Wealth has financial advisers that are authorised to provide personal financial advice. Call 02 9615 4500 for more information on our available services.